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Plummeting Confidence in the govt's ability to tackle PSB bad loans
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.

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COMMENTS

Shankar Khadye

1 year ago

Good Article. Apparently, people never learn. I hope the last thing RBI or the Government does is to lower rates and flood the system to cheap money. In that case, we will have a bigger problem down the road (just as Advanced Economies are facing now).

The right things to do are - write-off the losses, tighten loan criteria, increase reserve ratios, and make it easy for lenders to dispose off assets in case of defaults. Till these happen, we will simply be going round the wagon.

Yes, that would mean putting the economy in recession and bursting the real-estate and equity market bubbles. But in a country where less than 2% own equities, does it matter?

- Shankar Khadye

Gupta

1 year ago

Blame Indira Gandhi for nationalizing these white elephants or the previous 10 years of Congress Govt under whose watch these loans were given with brazen corruption rather than blaming the current government! NPAs of lakhs of crores can't be fixed by any Govt overnight. Let's be realistic about that. It is worth asking the question why only Public sector banks and ICICI Bank and Standard Chartered Bank and to some extent Axis Bank have these problems. How come HDFC Bank or other private / foreign banks escaped this problem by such a wide margin v/s their competitors? There is more to it than is visible on the surface.

While not everything being done by current Govt may be perfect, they are far superior to the previous dispensation. Although they may not be performing to the full potential of a govt with majority, they are still positive contributors and score a 5/10 v/s the previous govt which scored a -10/10 on every single parameter.

R Balakrishnan

1 year ago

Cannot think of any solution to the PSU Bank mess. Maybe they should be just payment banks. Put all the deposits in G Sec. Credit needs of good companies are met from non-bank sources in most cases. Or restrict PSU Banks to give loans to any credit other than a domestic AA from at least two rating agencies, one of which should be CRISIL or ICRA.

MG Warrier

1 year ago

It is tough for anyone to rescue public sector banks from the shameful situation they have been dragged into by government policies or to defend the high level of bad loans they have accumulated. Since nationalisation, political leadership has been meddling with the working of public sector banks, using the ‘assumed’ ownership rights, with immunity. The miraculous survival of PSBs including SBI can be attributed to the net interest margins (NIMs) banks in India were privileged to enjoy continuously. Even during the current ‘Rajan era’, RBI has been merciful when there has been near ‘cartelisation’ when it came to passing on the benefits of lower resources cost as reduction in lending rates.
Judging the performance of banks with reference to the bad loans accumulated or the support they need from the owners, by itself, is not rational. Comparison is always with private sector banks. To get a clear picture, one has to remember that PSBs’ share in banking business is three times that of private sector banks. What prevents the private sector banks from increasing their share in business is a riddle policy makers and regulators should solve, at least at this stage, before succumbing to the pressure to again ‘privatise’ public sector banks.
It may be recalled that the context of bank nationalisation was refusal of private sector to plough back deposits mobilised from small savers to sectors that benefited inclusive economic development. The residual and new private sector banks continued to be selective in providing credit and the social responsibility of banking system was largely met by PSBs. The corporates which did not want to follow the banking discipline used their influence to get credit from PSBs. All these together resulted in differential treatment for public and private sector banks. Given a level playing field and semblance of functional autonomy, the future of Indian banking is safe in the hands of PSBs.
M G Warrier, Mumbai

Gopalakrishnan T V

1 year ago

The banking system is in a mess and struggling to find ways and means to get out of the festering problem of non performing loans generated on a continuous basis due to lack of professionalism and political interference in its management. The so called autonomy has been elusive and the public sector banks survive because of budgetary support and subsidy provided by the depositors and other stake holders particularly good borrowers. The economy which is dependent on the banks for its growth is the worst sufferer and the loss suffered by it on a recurring basis is something beyond any calculation. However, the problem faced by the banks gets glossed over and no serious attempt has been made to introduce a lasting solution to make them healthy and self dependent for their survival. The solution to the menace of bad debts of banks lies within the banks and the borrowers themselves by introducing a self correcting mechanism to liquidate the bad debts with the fines levied from bad borrowers and banks for their acts of undisciplined way of conducting the credit portfolio right from the sanction of loans to their liquidation. The problem of bad debts is definitely not an insurmountable one as is made out to be and this requires willingness and guts on the part of authorities to adopt the solution to discipline both the borrowers and banks without fear or favour. This much autonomy is essential for both the banks and the otherwise competent Reserve Bank to carry out their functions professionally without any sort of interference from the Government and politicians.

Ponder over passive euthanasia issue, SC tells government
New Delhi : The Supreme Court on Monday directed the government to consider the matter of passive euthanasia and made it clear that pendency in the apex court should not come in the way of authorities to take a decision on the matter.
 
The Centre earlier told the court to allow a public debate on passive euthanasia or "living will" by terminally ill patients not willing to prolong their lives by the use of life-support system instead of determining the issue judicially, as sought by non-governmental organisation Common Cause. 
 
Urging that the public debate on the contentious issue would be a better course, Additional Solicitor General P.S. Patwalia, appearing for the Centre, told an apex court bench of Justices Anil R. Dave, Kurian Joseph, Shiva Kirti Singh, A.K. Goel and R.F. Nariman that the law commission report was under examination of the health ministry.
 
Seeking deferment of court hearing till July, Patwalia told the constitution bench that once the health ministry examined the law commission report, the law ministry will draft the necessary law.
 
Even as NGO counsel Prashant Bhushan urged the court to consider the limited issue of a terminally ill patient executing a 'living will' as the right to die with dignity was a part of the right to life, Justice Kurian Joseph asked him if he wanted "judicial decisions or the people's decision".
 
Allowing the Centre's plea for more time, the bench adjourned the matter till July 20, observing that the government was considering the issues of passive euthanasia and living will.
 
The court made it clear that the matter's pendency before it should not come in the way of a decision by authorities who should go ahead with consideration of the issue. 
 
As Prashant Bhushan pointed to a long adjournment saying the petition was filed in 2005, the court said" "We are only giving a reasonable time."
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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