by Harish Gupta, National Editor, Lokmat Group
Next week, as Finance Minister Arun Jaitley, presents the 2016-17 budget, the fear of many trillions of stressed assets hangs on him like Damocles’ sword. It is a real fear, not an imaginary one, like that of Islamists and Maoists hatching sinister plots from the JNU campus. The ghost of bad loans by banks was stalking the government for quite some time but its enormity became evident after Reserve Bank of India Governor Raghuram Rajan ordered an asset quality review last year of the 40-odd PSU banks for the two successive quarters ending in December 2015 and March 2016.
Asset quality review is like the deep body scan done on a patient found with tumour that could be deadly. It measures the spread and depth of the rot. The result of the December quarter review alone has sent shockwaves all around. It had the profits of several PSU banks tumble. Listed banks added nearly 1 trillion rupees in bad loans in the quarter, which denoted a 29 per cent rise in hobbled assets since September, the last month of the previous quarter. Gross non-performing assets of 39 listed banks zoomed to Rs 4.38 trillion for the quarter ending 31 December 2015, from Rs 3.4 trillion an end-September. State Bank of India, the country’s largest lender, wrote off over Rs 20,000 crore as bad loan as it braced for a 67 per cent drop in profit. But that’s the beginning. A second bloodbath is expected after January-March quarter review in which gross NPA may touch Rs 7 trillion.
As the asset quality review began getting discussed, Rajan gave the first hint of his future action plan when he said that the NPA classification is an “anaesthetic” that might enable the banks to perform “extensive necessary surgery” and thus put themselves back on their feet. Rajan’s tone and imagery are sombre. It hints at the present diagnostic operation exposing even more stressed assets (NPA plus debts restructured under various corporate programs) coming to light. Analysts are already talking of aggregate figures ranging from Rs 11 trillion to Rs 16 trillion. It is four times the total Plan outlay for 2015-16 in the last Union budget. The government is talking of setting up an asset reconstruction company (ARC), or a ‘bad bank’ as the new terminology goes, which may be tasked to buy the bad loans and then put them on the block at a convenient time and price. It is doubtful if such a remedy will prove fruitful. The US had in the past initiated a Troubled Asset Relief Program (TARP) in which the federal government bought toxic loans worth US 475 billion; it was finally sold at US $ 12 billion. The ‘bad bank’ project is, in other words, a device to whitewash banks’ ledger books with taxpayers’ money. Jaitley has already announced a bank recapitalization programme, Indradhanush, at a cost Rs 70,000 crore to be spent till 2019. The first instalment of Rs 25,000 crore is being pumped into banks in 2015-16. Bankers have been saying this amount is woefully inadequate and the government may have to cut down or shelve many of its gigantic projects—be it the smart cities and digital India and bullet train—to provide the banks at least a trillion rupees in the next two to three years.
Will that help? If the state patches a sixth of the banks’ wound, can the banks stand up again? In the 1990’s, the government gave Rs 20,000 crore to banks for recapitalization. The banks, in their turn, used the money to buy government securities, called Recapitalization Bonds, so it did not burn a hole in the exchequer. Atal Behari Vajpayee government also written off more than Rs 50,000 crores to revive banks and bad assets. But we are now faced with a haemorrhage many times larger in scale. The government’s recapitalization programme is a mere band-aid for a deep wound.
In a telling chart published in Financial Times, the British newspaper, last week, depicting year-to-year rise in bank NPAs in India, it was clearly shown that the toxic loans were rising at the steepest gradient from 2008 to 2011, and then it sloped down to a plateau. RBI has been directed by the Supreme Court to hand over the identity of the key borrowers with loans above Rs 500 crore. It will be up to the apex court then to decide if the names could be made public. But naming and shaming the culprits may be more sensational than effective. The big-time borrowers who were able to leverage their clout with the finance ministry (which, in its turn, appoints PSU bank board members including chairman) in the initial UPA-2 years are big enough to be investigated and prosecuted by the NDA government.
The “surgery” that Rajan is talking about is for the government to gracefully exit from the banking business. That alone can keep their vaults free from the contamination of corrupt politicians and their capitalist cronies. In the early Seventies, the late Indira Gandhi got banks nationalized to reach credit to the agricultural class which she wanted to build up as her loyal constituency. It hardly happened that way, with ‘priority sector’ loans being diverted to a variety of middlemen, including loan sharks. It is time government stopped dictating terms to commercial banks and, most importantly, ceased from owning them. During 2014-15, when indices were ruling high, the Modi government could profitably divest its stake in the banks. But it held on tight to its holdings and lost the opportunity then to rake in mullahs. Now it’s too late. It is also strange why Rajan wants to undertake surgery when the outcome is too well known. Let the patient remain in the ICU. Rajan made Arun Jaitley’s difficult when he was shouting from the roof tops and didn’t reduce interest rates. The government is now talking of 51 per cent as the new threshold of the state’s stake in PSU banks. But where are the buyers now and why 51%? Why not 49? Some banking “secrecy” indeed!
