Banking sector's worrisome woes continue

BRP Bhaskar
Gulf Today

India’s largest public and private sector banks are grappling with problems arising from systemic weaknesses and their unhealthy consequences.

The State Bank of India, with a customer base of 420 million and balance-sheet of more than Rs 30,000 billion, is the only bank from the country among the world’s top 50. It reported a net loss of Rs 65.47 billion for the financial year that ended on March 31 as against a net profit of Rs 104.84 billion in the previous financial year.

It attributed the loss to “an increase in provisions for non-performing assets (NPAs) and mark-to-market investment portfolio”. In plain language, this means the bank had to take into account possibilities of non-recovery of some loans and fall in market value of securities.

NPAs, always a source of worry, have become a cause for increased concern in view of the ease with which high-profile borrowers like playboy-businessman Vijay Mallya and diamond merchants Nirav Modi and Mehul Choksi have been able to slip out of the country.

Of the 21 state-owned banks, 19 were in the red when the last financial year closed. Their total loss was about Rs 873.57 billion.

The Punjab National Bank, which is at the centre of the Nirav Modi-Choksi scam topped the list with a loss of Rs 122.83 billion, followed by IDBI Bank with Rs 82.38 billion. SBI was in the third place.

At the end of 2017, the gross NPAs of all banks stood at a whopping Rs 8,409.58 billion. Industrial loans accounted for Rs 6,092.22 billion in NPAs, the services sector for Rs 1,105.20 billion and the agricultural sector for Rs 696 billion.

According to information provided to Parliament, the industrial sector led in delinquency with 20.41 per cent of the advances turning into NPAs, as against the agricultural sector’s 6.53 per cent and the service sector’s 5.77 per cent.

SBI, the largest bank, has the highest NPA figure of Rs 2,015.60 billion, and is followed by the Punjab National Bank with Rs 552 billion and IDBI Bank with Rs 445.42 billion. 

Among private sector banks, the ICICI Bank has the most NPAs: Rs 338.49 billion. A large loan it gave to Videocon Industries, a home-grown consumer durables company, is now under investigation for suspected quid pro quo as that company pumped money into NuPower Renewables, a firm owned by Deepak Kochar, husband of ICICI Bank CEO Chanda Kochar.

Videocon, which was once a highly profitable company, filed an insolvency petition before the National Company Law Tribunal last week. It owes about Rs 200 billion to a consortium led by SBI.

The steady rise in the growth of NPAs over the years raises the question whether the Reserve Bank of India has been diligent in the performance of its role as the central bank. 

Last February, while going through SBI’s documents relating to the financial year ending March 31, 2017, RBI found that it had understated its NPAs by 21 per cent and overstated its profits by 36 per cent. The standard RBI practice is to publicly report the divergence if it exceeds prescribed limits, which are quite liberal, with a view to naming and shaming the bank. No one is punished for misleading the regulator and the general public.

In April, RBI reportedly put 11 state-owned banks under its prompt corrective action framework which entails restriction on their lending activities.

Three days ago Piyush Goyal, who is officiating as Finance Minister, announced the setting up of a committee with instructions to submit recommendations for the formation of an asset reconstruction company for quick resolution of stressed bank accounts in a transparent manner.

When gross irregularities are investigated, bank officials get caught and are charged with corruption. But bankers do not always bend the rules for personal gain. Sometimes they do so at the behest of politicians who want to help their financiers.

Former RBI Governor YV Reddy has said that the government is pressing banks to lend to infrastructure projects, which are not an area in which they have competence, and to make depositors share the burden of bank frauds. 

A lasting solution to the banks’ woes cannot be found until the political overlords learn to respect the professional judgment of bankers.--Gulf Today, Sharjah, June 12, 2018

Banks rescued at cost of poor

BRP Bhaskar
Gulf Today

Was demonetisation of high-value currency notes, which inflicted much pain on honest citizens in the last days of 2016, intended to eliminate black money, as Prime Minister Narendra Modi claimed on November 8? If so, it was a colossal failure.

Notes of Rs 1,000 and Rs 500 worth more than Rs 14,000 billion were in circulation when they were demonetised. Out of this, the government expected about Rs 10,000 billion to come back. So it told the Supreme Court. The rest, it assumed, was black money and would go out of circulation.

By December 13, the Reserve Bank of India received demonetised notes worth Rs 12,440 billion and the deadline set for their surrender was still 17 days away. After that there has been no word from the RBI on the subject. Modi, who dwelt on the aftermath of demonetisation in an address to the nation on New Year’s eve, too avoided it.

Dashing the government’s fond hopes, smart criminals converted their black money into legal tender. Misuse of the Jan Dhan accounts which had come up under Modi’s scheme to give the poor access to banking services was one of the tactics they employed.

After demonetisation the number of Jan Dhan accounts went up from 255.1 million to 262.0 million. Deposits in these accounts swelled from Rs 456.37 billion on November 8 to Rs 746.09 billion on December 7 before falling to Rs 710.37 billion. The rise in deposits was 112 per cent in Karnataka and 111 per cent in Gujarat. Evidently crooks laundered black money using the poor as cover. The government has now ordered a scrutiny of the Jan Dhan accounts.

The demonetisation decision came immediately after the government received voluntary disclosure of concealed incomes to the tune of Rs 673.82 billion. It was followed by income-tax raids in several states in which Rs 30 billion in undisclosed incomes was detected. The cash seized included Rs 860 million in new notes issued since November 8.

Modi’s demonetisation differed from similar exercises undertaken by his predecessors. It amounted to virtual impounding of people’s money, at least for the time being, as there were severe curbs on withdrawals from bank accounts. Former Prime Minister Manmohan Singh called it organised loot.

With more money than anticipated coming in and withdrawals subject to restrictions, the commercial banks are flush with money. In his New Year’s eve speech, Modi said the situation represents a golden opportunity for the banking system. To understand the significance of that observation one has to look at the highly vulnerable state of government-owned banks.

The banking system has a large public sector created since Independence with the takeover of large private banks at different times. The largest one is the State Bank of India, created by nationalisation of the British-owned Imperial Bank of India in 1955. Seven banks of former princely states were made SBI’s associates in 1960. The 14 largest private banks of the time were nationalised in 1969. The next six big private banks were taken over in 1980.

Imprudent financial management under political influence endangered the health of most public sector banks during the past few years. RBI data shows that in the financial year ending March 2016, the country’s banks added Rs 4,400 billion of fresh non-performing assets (NPA), defined as “loans or advances of which principal or interest has been overdue for 90 days”. Public sector banks accounted for about 86 per cent of this – the SBI group 20 per cent, and others about 66 per cent.

Between 2006 and 2016, the public sector banks wrote off loans totaling Rs 2,510 billion. As on December 3, 2015, the commercial banks listed more than 7,000 account holders who together owed them Rs 7,054 billion as wilful defaulters.

According to information the government provided to Parliament, in June 2016 the top 20 NPA accounts of the public sector banks stood at Rs 1,450 billion. They urgently needed funds to tide over the situation. The Centre infused Rs 229.15 billion by way of capital into 13 of them last July. They wanted more.

There is reason to suspect that the government went ahead with demonetisation, overlooking its limitations as a measure against black money, to channelise funds into the floundering banking system. It certainly had a duty to rescue the banks but it was immoral to do it at the cost of the honest poor. --Gulf Today, January 3, 2017

Two-faced banking reform

BRP Bhaskar
Gulf Today

A seven-point programme to revamp the banking sector, unveiled by the Government last week, has enthused domestic and foreign interests seeking accelerated economic reform but it overlooks the chronic problem of corporate default afflicting the public sector institutions.

Finance Minister Arun Jaitley outlined the programme shortly after the end of the monsoon session of Parliament. The government’s plan to push through some important reform-related legislation had fallen through due to continuous disruption of the two houses by the opposition.

Global rating agencies Standard and Poor’s and Fitch Ratings had recently pointed out that banking reform was necessary to achieve Prime Minister Narendra Modi’s growth targets. Large corporates were holding back new investments pending action by the government, they said.

India’s major banks are government owned. They were brought under the state in stages. The British-owned Imperial Bank, which handled government accounts during the colonial period, was nationalised in the eighth year of Independence. Banks floated by the former princely states were later made its subsidiaries.

With the takeover of 14 private banks in 1969 and six in 1980, as much as 80 per cent of the industry came directly under the central government.

At the government’s instance the public sector banks expanded rapidly into the countryside. They also tuned their lending policies to meet the needs of priority sectors identified by the government. There was political interference in their working even as they played their part in promoting government programmes aimed at inclusive growth.

When the country took the first steps towards economic reform in 1991, it recognised the need for a competitive banking system. The main issues were the small capital base and low profitability of the banks.

The government infused additional capital of about Rs 200 billion and allowed the banks to raise more from the market subject to the condition that the government’s holding should not go below 51 per cent.

New laws were enacted to improve the health of the finance sector and banks were asked to adopt global standards. At that time more than 23 per cent of all bank advances were classified as non-performing assets (NPAs). As a result of the measures that followed NPAs came down to 16 per cent by 1998.

In the wake of the East Asian financial crisis, the government initiated more measures to strengthen the banks. It also brought in a new law to regulate credit information companies.

By 2008, NPAs were down to 2.4 per cent. However, they soon started rising again and stood at 4.5 per cent last year. Also, as much as 12.9 per cent of public sector banks’ advances was classified as “stressed advances,” a term which includes NPAs and restructured standard advances. The corresponding figure for private banks was only 4.4 per cent.

The public sector banks certainly need to bring down NPAs. This is a task which can be accomplished without deviating from the policy of increased financial inclusion.

There is enough material in the public dominion to establish that the rise in NPAs is not a result of policies meant to help the disadvantaged sections of the society.

Public sector banks have been coming under stress from two sources. One is the ever expanding demands of infrastructure development, particularly in sectors like power, steel and transport. The other is wilful default by unscrupulous businessmen.

While announcing the reform programme, Jaitley noted that there was improvement in the highways, steel, power distribution and sugar sectors. He studiously avoided the issue of corporate default.

Last year the All India Bank Employees Association made public a list of 406 defaulting borrowers of 24 public sector banks. It said the top 30 bad loan accounts stood at Rs 703 billion..

Heading the defaulters’ list was an airline company floated by a liquor baron which owed the banks Rs 26.73 billion. Two jewellery firms in the list had a combined loan liability of Rs 31.57 billion.

The AIBEA said the public sector banks had written off Rs 2,040 billion in 13 years, restructured loans to the tune of Rs 3,250 billion, and run up fresh bad loans of Rs 4,950 billion. Demanding that the government release the names of the major defaulters and lay down stringent loan recovery norms, its general secretary, CH Venkatachalam said, “If there is a political nexus, let it come out. The people should not be punished for corporate default.”

The government has decided to bring in personnel from the private sector to head some public sector banks. The theory promoted by some circles that the private sector banks are good commercial models stands on questionable grounds. One or two of the successful private banks are known to have been involved in illegal transfer of funds to foreign locations. - Gulf Today, Sharjah, August 18, 2015.