Is bad loan waiver another 2G scam?
The FY16 third quarter results were announced recently for state-owned banks and they exhibit a common theme - losses/sharp drop in profits and piling of bad loans. More is yet to come as the Reserve Bank of India (RBI) has tightened the asset provisioning norms and wants banks to provide for all bad loans by March 2017 when the new Basel III norms will become operative. The net non-performing assets (NPAs) of three out of the top five banks are more than 50 per cent of their net worth (capital, plus reserves). This is indeed alarming. Additions to NPAs in the fourth quarter of FY16 is expected to further weaken the ratio.
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Additional facts/figures reinforce the alarming position
1. 27 state-owned banks have written off Rs 2.77 lakh crore ($1 billion) of bad loans in the last ten years.
2. Out of this, Rs 1.14 lakh crore ($16.8 billion) or 40 per cent of the total bad loans were written off during the last three years from FY 2012-'15. As mentioned by RBI governor Raghuram Rajan in one of his speeches, "This money would have allowed 1.5 million of the poorest children to get a full degree from the top private universities in the country, all expenses paid."
3. A further Rs 52,227 crore are expected to be written off in FY16 (India Ratings report).
4. This would take up the total bad loans to Rs 3.29 lakh crore ($48 billion).
5. The proportion of stressed assets* surged to 17 per cent for public sector banks while for private banks, it is 6.7 per cent and for foreign lenders, 5.8 per cent as of September 2015. So the PSU banks' asset quality is the worst amongst the lot (almost three times worse than their peers).
6. Among the BRICS (Brazil, Russia, India, China, South Africa), India's NPA rate is the second highest after Russia, and this year it may surpass that of Russia.
The issue has been politicised with the BJP claiming that it is carrying on a cleansing process to clear the backlog of troubled loans disbursed during UPA 1 and 2 regimes. The Supreme Court has also intervened in the matter asking the RBI to furnish record/names of all defaulting companies who owe more than Rs 500 crore to banks or who have got their debt restructured under various CDR programmes.
"The SC wants to know how public sector banks and financial institutions are advancing such huge loans without proper guidelines or an adequate loan recovery mechanism, thereby putting a huge burden on the public exchequer," the court commented.
A commendable move by the court and some additional points which needs to be considered are:
1. How much of the above loans were secured?
2. What efforts were made to recover money owed through sale of such security and how much was recovered?
3. Were proper rules followed while disbursing these loans? Or were bank officials hand in glove with promoters as in the Zoom Developers case?
Corporate credit accounts for a majority of the bad loans
Housing loans have the lowest NPAs at less than one per cent. The corresponding figure for retail loans is less than three per cent while it is seven to eight per cent in case of farm credit. The highest delinquency is in the corporate loans category at 8-12 per cent. The RBI governor has repeatedly come down heavily on large defaulters for continuously eroding the "sanctity of the debt contract" in the country.
In case of individuals, banks, through the Credit Information Bureau (India) Limited (CIBIL), are able to check what is the total amount of loans that a person has borrowed, what is his EMI, his credit history and so on. There is no similar database which cover companies' loan portfolio and track record. This is very surprising as the amount of corporate loan involved compared to individual loans is very high.
A list of wilful defaulters is circulated to the banks by the RBI each quarter but we all know the limitations of this database. Classification of any default as wilful is tricky and can be challenged in court. The same default can be classified as wilful by one bank and not by other, as we have seen in the case of Kingfisher Airlines.
These big and powerful promoters who default use system loopholes to their advantage. They hire big lawyers and get stay orders from courts preventing banks from recovering their dues which then cave in to the blackmail/raw deal offered by the promoters. Higher losses ensure that interest rates on retail loans (which has lowest NPAs) and other loans is kept high to make up for the loss.
Vijay Mallaya of Kingfisher is the perfect example of the lacunae in the banking system. While his firms have defaulted crores of rupees in loans (for which he provided personal guarantee), he continues to enjoy a good and luxurious life, he continues to make the Kingfisher calendar with ravishing models in picturesque locations and recently brought a cricket team in the Caribbean Premier League which prompted the Punjab National Bank (PNB) to declare him as a wilful defaulter.
PSU banks are struggling more because of the following reasons:
1. Lack of consistent policies and coordination
Though all banks are owned by the government, they do not have a standard credit risk framework. Their rating and loss given default models are different. They have different ways of evaluating a particular company. Loan rejected by one bank is sometimes processed by another bank. There is a serious lack of coordination and credit information exchange on dubious counterparts, defaulters, credit track record and so on.
2. Lack of technical expertise to evaluate a project
PSU banks do not have people who can critically evaluate all projects and their costs. Scrupulous promoters inflate project costs to reduce their equity contribution. In a 70:30 debt:equity funding structure, if the project cost is inflated by 30-40 per cent, equity contribution required from the promoter is reduced drastically to 0-10 per cent. When Rajan was appointed as the RBI governor, he made a remark that banks are not here to finance the equity of the promoters (hinting at this problem).
The value of the security/collateral is inflated and hence does not reflect its true position and leads to much lower recovery when enforced in case of default. Low salaries compared with private sector banks is a big impediment in attracting talent to the PSU banks.
3. Corruption among PSU banks' rank and file
The Bhushan Steel-Syndicate Bank case is fresh in the public mind. The Central Bureau of Investigation (CBI) accused and arrested Bhushal Steel vice-chairman Neeraj Singhal on the charge of bribing Syndicate Bank CMD SK Jain to ensure that a Rs 100 crore loan was not declared as NPA. In another case, the Central Vigilance Commisssioner (CVC) recommended action against officials of 26 banks, which together provided Rs 2,650 crore to Zoom Developers, declared a non-performing asset.
Promoters' nexus with honchos of PSU banks is a big risk and impacts decisions on credit right from disbursing loans to classifying them as NPA or restructuring and lengthening the repayment period.
Cleansing the system is good but what about fixing responsibility
Cleansing the system of bad loans is good, but it also needs to be ascertained how and why this huge pile of bad debts accrued in the system. Naming and shaming scrupulous and wilful defaulters should be done. Banks should be advised to review the retail loans, personal loans and credit cards of these defaulting promoters.
Banks take risks to make money. But this money in the case of PSU banks is of the taxpayers and depositors. Any casual, unprofessional and orchestrated mismanagement of this money is a waste of the public exchequer and should not be tolerated. Accountability needs to be fixed, but unfortunately, it is missing from PSU banks' culture.
Is this another coal/2G scam in the making?
The amount of loss, that is Rs 3.29 lakh crore is much more than the Rs 1.86 lakh crore in case of the coal scam and Rs 2 lakh crore in the 2G scam. Further, this is actual loss and not opportunity loss as in the case of coal and 2G scams.
Above this, there are bad loans running into lakhs of crores of rupees which have been restructured where repayment periods have been extended and/or interest costs have been slashed. The top five PSU banks restructured Rs 60,000 crore of loans in FY15 alone. This is deferment of the imminent pain and some of it will come to haunt the banks later.
Among the infamous restructuring is of Reliance Gas Transportation Infrastructure Ltd (RGTIL), an unlisted company owned by India's richest man, Mukesh Ambani. Its total debt of Rs 16,000 crore was to be originally repaid by 2019, but has been extended till 2030-'31 despite the company posting losses. This is an example of perpetual support the PSU banks provide to many top groups in the country which points towards crony capitalism.
Critics argue that losses are part and parcel of banking business and too much is being made out of this problem. However, the hush-hush way in which these amounts have been written off/restructured and the magnitude of it is suspicious. Additionally, there is taxpayers' money involved. We don't care for private sector bank losses.
Have corporate houses benefited from this largesse in the same way as in the coal and spectrum allocation scams? Have rules been flouted to help promoters siphon off taxpayers' money? Is this another 2G/coal scam in the making? Only a thorough enquiry would help uncover it.
*Stressed assets comprise of non-performing assets (NPAs), restructured loans as well as written-off accounts.