Bad loans of banks at a frightening high and there is little action in sight
Just a year ago, in January 2015, prime minister Narendra Modi called for a unique initiative called the ‘Gyan Sangam’ in Pune. He said that this “reflected team spirit and a collective will to address issues” through dialogue and “to find solutions to problems.” This, he said, was “the first step towards catalysing transformation.” The gyan fest had the entire top brass of the finance ministry and the Reserve Bank of India (RBI) in attendance and those of us, who pointed out that many of the top public sector banks (PSBs) were headless, were slapped down on social media and told not to be negative. The PM was primarily focused on rapid execution of the Pradhan Mantri Jan Dhan Yojana (PMJDY) and the no-frills accounts with Rupay card which were to bring about a revolution through the financial inclusion of millions of un-banked masses. Oh yes, he also asked bankers to establish banks “which rank among the top banks in the world.”
It is February 2016 and PMJDY is apparently doing fine. According to government data, 203.8 million accounts had been opened as of 20th January; these had deposits of over Rs30,000 crore, i.e., around Rs1,500 per account. Unfortunately, one cannot say the same about the financial health of banks or about finding solutions to bad loans of PSBs. All PSBs, with few exceptions, have reported a massive jump in bad loans.
The RBI governor Raghuram Rajan’s repeated warnings about bad loans and wilful defaulters probably did not convey the rot within as much as the stark numbers did, when banks began to announce their third-quarter results. The Indian Express, based on a Right to Information query, reported that bad debts of 29 PSBs had more than trebled between 2013 to 2015 jumping from Rs15,551 crore to Rs52,542 crore by the end of March 2015.
Punjab National Bank’s December quarter net profit dived a steep 93.4% and it awaits recapitalisation, at taxpayers’ expense. Dena Bank and Allahabad Bank reported a loss of over Rs1,100 crore. At Bank of Maharashtra, the employees’ union has put out a statement saying that the bank’s ‘existence is at stake’ so the union will undertake loan recovery. Interestingly, one of the top bad loan accounts is Lanco Infratech whose promoter is the Congress MP, Lagdapati Rajagopal. He is infamous for spraying his parliament colleagues with pepper spray inside the house. While his company owes the banks nearly Rs150 crore, the man had declared his personal assets at Rs299 crore in his election affidavit in 2009.
While PSBs claim to be diligently following RBI’s instructions to disclose and provide for bad loans, there is no clear agenda for recovery. Some banks are resorting to eyewash by ordering forensic audits, even though senior bankers are fully aware of diversion of funds and fraud. The brazen wilful defaulters openly flaunt their wealth at unbelievably extravagant overseas weddings which are often attended by top bankers.
A large number of wilful defaulters are politically exposed persons (PEPs). Is there a game plan to make them pay up when they can harass bankers through political pressure? What about the cases where capricious government policies and lenders are at fault, projects are stalled or stuck in litigation? This is true of large infrastructure projects across sectors. The government’s only answer is to introduce a Bankruptcy Bill which has several major flaws and cannot be really effective. This was exactly the problem with the SARFESI Act that had been touted by banks and policy-makers as the panacea for bad loan issues but failed miserably. Other than this, we have seen no solutions, leave alone any sign of ‘catalysing transformation’. Instead, a newspaper reports that the government is getting ready for another Gyan Sangam in early March.
Investors who believed that the Gyan Sangam of 2015 meant achche din for PSBs are the ones who have probably taken the biggest hit. The erosion of banks stocks, barring a few like HDFC Bank, Kotak Mahindra Bank and IndusInd Bank, has been anywhere between 35%-50% in the past year.
More embarrassing for the government is that the combined market-capitalisation of PSBs (Rs2.53lakh crore) is just a shade more than HDFC Bank’s market-cap (Rs2.47 lakh crore).
As this article goes to print, there is blind fear among the few remaining bulls as the Sensex crashed 800 points on 11th February and is well below the level when Mr Modi assumed power.