Troubled banking system

BRP Bhaskar
Gulf Today

How healthy is India’s banking system, especially its large public sector component? The question has assumed significance following reports that state-owned banks wrote off bad debts to the tune of Rs 2,110 billion between 2004 and 2015.

Based on material provided by the Reserve Bank of India, the country’s central bank, in response to a Right to Information query, the Indian Express said the banks had written off as much as Rs 1,141.82 billion in the last three years alone. Bad debts which stood at Rs 155.51 billion in March 2012 had shot up to 525.42 billion by last March, it added.

Public sector units dominate India’s banking sector. The British-owned Imperial Bank of India, which the government took over in 1955 and renamed State Bank of India, is the country’s largest commercial bank. It now has more than 16,000 branches, including 191 abroad. Its assets stood at Rs 20,480.80 billion a year ago. Banks set up by former princely states function as its associates.

Fourteen large private banks were nationalised in 1969 and six more in 1980.

The SBI topped the list with write-offs of Rs 400.84 billion in the last three years. The Punjab National Bank, the second largest bank, stood next with a write-off of Rs 95.31 billion.

Responding to media reports, the Finance Ministry, the RBI and the SBI said loan write-off was basically a technical exercise to cleanse the balance sheet and achieve taxation efficiency. It was done at the head office level and did not preclude the branches from continuing recovery efforts.

However, many financial analysts voiced concern over the rise in bad debts and the recent fall in bank share prices. RBI Governor Raghuram Rajan accused critics of making claims bordering on scare-mongering. He attributed the fall in share prices to the turmoil in the world markets but conceded that the performance of some banks, particularly public sector units, was not pretty.

There may be no need for panic, as Raghuram Rajan says, but there is certainly cause for worry. The RBI recently put the value of banks’ stressed assets (including restructured loans) at Rs 7,400 billion. This means 10.9 per cent of all loans is stressed. Standard and Poor’s has forecast an 11-to-12 per cent growth in stressed assets during the year.

The issue of bad debts was a well-kept secret until the All India Bank Employees Association released a list of top defaulters in 2014. It contained names of 406 account holders who owed the banks Rs 703 billion.

Liquor king Vijay Mallya’s Kingfisher Airlines headed the list with debts of Rs 26.73 billion. The Winsome Diamond and Jewellery Company was a close second with debts of Rs 26.60 billion.

Among the other big defaulters was a construction company owned by KS Rao, who was Textile Minister in the Manmohan Singh government at that time. Raghavendra Rao and Deepak Puri, two businessmen whom the government had honoured with Padma awards, also figured in the list.

The AIBEA said bad debts of public sector banks had risen from Rs 390 billion in 2008 to 2,360 billion in 2013.

It alleged that banks, including private and foreign ones, had written off loans totalling Rs 2,040 billion between 2001 and 2013 under political pressure. It asked the RBI to publish the names of defaulters and demanded enactment of legislation to improve the recovery process and to make wilful default a criminal offence.

Raghuram Rajan, professor of finance at the University of Chicago and a former chief economist at the International Monetary Fund, took several steps to help the banks deal firmly with defaulters immediately after he took over as RBI governor in 2013. Guidelines issued by the RBI allowed banks to convert debt into equity and take control of defaulting companies if debt restructuring failed. The banks could then find new promoters to run the companies.

The Modi government, which assumed office the following year, announced a seven-point programme to revive public sector banks. It has only been implemented partially.

The latest debt figures indicate that the steps taken by the RBI and the government have not yielded anticipated results. The government told Parliament last year that 30 top defaulters owed public sector banks Rs 951.22 billion. This was more than one-third of their non-performing assets.

The name-and-shame policy adopted by some banks also does not seem to have had any effect on the defaulters.

The RBI and the government must urgently come up with foolproof measures to ensure the good health of the banks with a view to safeguarding the interests of the depositors and honest borrowers. --Gulf Today, Sharjah, February 16, 2016.

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.