Spectre of Debt
Public banks must develop mechanisms for better governance and improved lending strategies.
Financial liberalisation has done two things to the lending strategies of public sector banks (PSBs). One, it increased the share of retail credit assets in total assets such as credit card advances, housing and personal loans; in short, it financed borrowed consumption expenditure. The other, financing infrastructure through government-enforced pressure on public banks. The reason for the latter was twofold: an inadequate corporate bond market and the unwillingness of private players to deploy their own capital for long-term financing of infrastructural projects; and the government’s reluctance to invest in infrastructure given its fiscal commitments. The result was reliance on public–private partnerships for financing infrastructure projects.
The boom of 2004–08 was largely driven by private investments in infrastructure that led to an acceleration in India’s gross domestic product (GDP) growth rate. The burden of financing these projects fell on the PSBs. These banks are now facing the downside of loan exposures, with alarming ratios of non-performing assets (NPAs) as a proportion of total advances.
Recent estimates by the Reserve Bank of India (RBI) show that stressed assets, that is, gross NPAs, restructured standard assets, and written-off accounts for the banking system as a whole, which stood at 9.8% at the end of March 2012, moved up to 14.5% by the end of December 2015. During the same period, the stressed assets of the PSBs increased from 11% to 17.7% of total advances. To put the figure in perspective, this adds up to almost the sacrosanct fiscal deficit target of the government. There is strong likelihood that the proportion of NPAs in stressed assets will rise in the near future if the already restructured loans of the PSBs become NPAs, given the overall macroeconomic situation of the country and a year and half of falling exports. This severely impairs the profits of banks; many state-owned banks have recorded losses—at the quarter ended March 2016, the Punjab National Bank noted a record loss of ₹5,367 crore. The cumulative losses of 20 PSBs stood at₹14,283 crore in the fourth quarter of 2015–16 against a profit of ₹3,918 crore in the same quarter of the previous year.
The Financial Stability Report of the RBI points to a high share of infrastructure-related debt in the stressed assets of PSBs. Mining, iron and steel, infrastructure and aviation in total advances of the PSBs stood at 25.1% in December 2014; the proportion should have increased since. Their share in the stressed assets held by the PSBs was a much higher 45.5%, of which 30.9% was accounted for by infrastructure alone, with power generation accounting for 17.3%. An internal report by Credit Suisse Bank titled House of Debt first released in 2012 highlighted the borrowing spree of 10 leading Indian companies, many of them infrastructure firms. In more recent versions, the report showed how these companies were overleveraged with rising debt–equity ratios. This raised concerns for the government. Bad governance, cost overruns, stalled projects, and pricing constraints have affected the viability of many of the companies involved. Studies have pointed out that there are a few bad apples in the basket; the corporate sector as a whole is not overleveraged. In fact, it is these aforementioned four sectors, along with textiles, that account for more than half of the stressed assets of banks.
A related issue, which drew much attention in the media, was instances of wilful defaults. Even as the RBI was chary at first naming wilful defaulters, and has now agreed to disclose the big names, media portals have listed the top 10 wilful defaulters, including the now infamous “king of good times,” Vijay Mallya. The top-10 list kept changing with each new set of information that came out. Estimates of wilful defaults range from ₹56,000 crore to ₹5,00,000 crore, but no official estimates have been released by the RBI.
The RBI’s push for banks to clean up their balance sheets to meet the Basel III capital adequacy norms has also increased the visibility of NPAs. The RBI made banks undergo asset quality reviews to clean up their books of account as a result of which it found that almost half of the lenders’ stressed assets had not been reported. Earlier, restructuring by extension of maturity, conversion of debt to equity or a cut in interest rates permitted stressed assets to be recorded as standard restructured assets, but the RBI’s tightening of norms for classification of assets as non-performing has brought into focus the magnitude of the problem. With inadequate budgetary allocations made for recapitalisation, the government’s position on raising capital through equity sales for banks would in effect mean privatisation of the public banking system. The gains of public banking, as global experience has made clear, are too precious to be caught in the narrative of inevitable privatisation. Private banking brings with it problematic incentive structures, as the sub-prime crisis in the United States has shown, and even in India, it is still depositors and the general public who end up bearing the risks. India’s PSBs, which are relatively risk-averse, have so far been able to insulate the country’s financial systems from global financial shocks. Even as financial liberalisation has forced banks to fuel the credit- and infrastructure-led growth of the last decade, it is imperative that they develop better governance practices and improve their lending strategies. It is also imperative that corporates pay their dues.
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