Piyush Goyal, a former nominated director on Bank of Baroda (BoB) and State Bank of India (SBI), probably understands that the dangerous drift caused by the scams and losses at public sector banks (PSBs) which, compounded by actions of the past four years, could snowball into a serious crisis. So it is just as well that prime minister Narendra Modi has given him temporary charge of the finance ministry, until Arun Jaitley recovers from kidney transplant.
Like a good politician, Mr Goyal also understands the optics very well. So his first action on taking charge was to hold a day-long meeting with the heads of 11 PSBs that have been placed under prompt corrective action (PCA) by the Reserve Bank of India (RBI) and go public with his assurance of ‘all possible help’ to come out of the PCA framework as quickly as possible. Under PCA, RBI has placed severe restrictions on 11 PSBs including on distribution of dividends, remitting of profits, expansion of bank network and fresh lending, as well as capped management compensation and directors’ fees. The 11 banks are: Dena Bank, Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce and Bank of Maharashtra; these account for 30% of the deposits and advances of all PSBs.
Remember, Mr Goyal had faced a similar situation on 29 September 2017 immediately after taking over as railway minister. A horrific stampede that killed 23 and injured 39 at the Elphinstone Road railway station (Mumbai) exposed the neglect of crucial infrastructure at the exploding business hub in central Mumbai. Mr Goyal held day-long meetings with railway officials and, once it was clear that the railway corps were unlikely to construct a foot-over-bridge quickly, he called in the army and got it done in record time; it was also a signal to the railway bureaucracy and engineering department that they would have to buck up and mend their ways.
In the banking sector, the massive pressure of bad loans is probably a bigger problem than the creaking and outdated infrastructure of the railways, although it does not lead to fatalities of the Elphinstone Road kind. The non-performing assets (NPAs) are officially estimated at Rs8 lakh crore; but, according to Dr KC Chakrabarty, former deputy governor of RBI, a more realistic figure is Rs20 lakh crore. RBI’s new norms for income recognition have already forced a spate of new disclosures from PSBs as well as high-flying private banks.
Mr Goyal has started with a lucky break at the finance ministry. The Insolvency and Bankruptcy Code (IBC), rammed through by the prime minister, delivered its first big breakthrough a day after Mr Goyal took charge at the finance ministry. The controversial Bhushan Steel, whose total debts were a massive Rs46,062 crore (almost equal to the national budget on school education, says a media report), was acquired by the Tatas at Rs36,400 crore and a 12% stake in the company. What makes this truly historic is that the lenders got back most of their principal. Quick to emphasise the significance of the Bhushan Steel acquisition, Mr Goyal tweeted that the price paid by the Tatas (which many think is too high) is four times the estimated liquidation value of Rs14,541 crore.
The biggest breakthrough, however, is to the prime minister’s credit. It is probably the first real signal to the crony capitalist club that its unlimited ability to influence government is, finally, over. In the Bhushan Steel case, too, the promoter group, despite being caught bribing the Syndicate Bank chairman for fresh loans, is leaving no stone unturned in trying to delay and sabotage the resolution process through multiple litigations by some proxies. This exemplary display of strong political will was, unfortunately, eclipsed by the many recent banking scams (Nirav Modi and the jewellery scams) and the politics in Karnataka.
Another breakthrough, which went almost unnoticed in the mindless and disruptive public debates that have marked this government’s tenure, is the big victory against the flamboyant liquor baron Vijay Mallya on 8th May. A court in the United Kingdom ruled that a consortium of Indian lenders can impose an Indian court’s decision against Mr Mallya and also refused to overturn a worldwide freeze on his assets. Although Mr Mallya can, and will, probably appeal that decision, a full reversal of the order seems unlikely after the judge disallowed an automatic appeal of the order.
Those of us, who have long followed first-hand Mr Mallya’s skill, at gaming the judicial system and ‘influencing’ regulators and investigators handling his cases, understand the political message behind India fighting and winning a good case. Otherwise, from Bofors to Bhopal and innumerable others, our regulatory agencies are legendary for making a hash out of the open-and-shut cases and losing them in international courts.
Although the amount involved in Vijay Mallya’s case (Rs9,000 crore) is significantly lower than in the Nirav Modi-Mehul Choksi case (Rs14,000crore) or the top12 defaulters, including Essar Steel, identified by RBI, the determined action signals that escaping abroad, to live on money stashed in tax havens, is no longer as safe and sure as it was in the past.
But, remember, these are just small, initial victories in tackling mammoth NPAs and the industrialists who owe banks big money are busy with their frantic machinations to bid for their companies through foreign fronts. If allowed, the resolution will be nothing more than a round-robin deal where dubious industrialists will bide their time and buy back their companies once the controversy has faded from public memory—again financed through fresh bank loans.
To the government’s credit, the prime minister’s advisers have been open to feedback about such manoeuvres and there seems to be some determination to thwart such collusive deals. The resolution of Essar Steel, which is going well so far, is a big test case. The outstanding debt in this case is over Rs50,000 crore with interest, at the end of 2017.
Another big test for the government is how it handles Air India. The bid conditions have disappointed powerful potential bidders and, according to the scuttlebutt, there is a deliberate attempt to arm-twist bidders to favour political favourites. We can only hope that the good work in resolving Bhushan Steel and other cases is not undone by bad decisions in Air India. Although some of the bid conditions have been relaxed, based on feedback, aviation experts believe that the present proposal, which does not realise the value of various parts of Air India’s businesses, is not the best way to sell the national carrier.
A few big resolutions of NPAs will be a big help to the government in its 2019 election campaign. But the turnaround of banks requires a lot more work to ensure that things do not slide back into the messy ways of the past. Mr Goyal is correct in blaming the United Progressive Alliance (UPA) for most of the problems of bad loans, but his own government has done nothing to improve the basic structure of PSBs, make bank management and regulators more accountable and independent, give teeth to the Banks Board Bureau or end the dubious practice of writing off loans of large corporates as a clean-up and tax-saving measure (Dr Chakrabarty has called it the ‘biggest scandal of the century’).
What we have just seen is a very positive first step; but we need a lot more determined and unwavering action to achieve a real turnaround. One banker puts it correctly, if rather facetiously, when he says, “Piyush Goyal’s sound bites are, indeed, good; but will they turn into a symphony or mere cacophony?” Well, the country is watching.