Exceptionalism in Indian banking
Instead of creating a Bad Bank, the government should help PSBs recover the maximum possible from NPAs and move on quickly
Higher lending for long-term investments in India would obviously nudge growth upwards. At end-March 2010 and 2011 growth in lending for public sector banks (PSBs) was booming at 19.9 and 21.5 per cent (year-on-year) and for private banks the comparable numbers were 12.9 and 23.9. By March 2017 credit growth for PSBs was down to 1.5 and has recovered somewhat to about 5 per cent by March 2018. For private banks, the same numbers for 2017 and 2018 were 17.3 and 22 per cent (Source: RBI Financial Stability Report released on June 26, 2018). However, the outstanding stock of private bank loans is much lower than for PSBs and are mostly shorter term for working capital, consumer credit and less for long gestation e.g. steel, power and cement projects.
Fresh bank lending to the private sector is not driven just by the availability of funds. Banks have to be convinced that the credit quality of corporate borrowers is acceptable and the latter must sense buoyancy in demand for their products and services. Currently, it would be difficult for the many prominent Indian firms whose interest coverage ratios are below one to access fresh borrowings. A substantial fraction of the high volumes of lending in the period 2009 to 2014 is a non-performing asset (NPA) today. As a fraction of total advances, the gross non-performing assets (GNPAs) of PSBs stood at 13.5 per cent as of end-September 2017. By end-March 2018, the GNPAs of PSBs had risen to 15.6 per cent.
In the Nirav Modi case, in which Punjab National Bank (PNB) has lost ~130 billion, it is patently absurd that a junior rogue official in collusion with some others could have fooled senior PNB management and auditors for as long as seven years. It also beggars belief that PNB claims it did not receive RBI’s instructions of November 2016 to strengthen risk management systems including integrating their SWIFT (Society for Worldwide Interbank Financial Telecommunications) and Core Banking System (CBS). Given the outlandish nature of claims and counterclaims in this case, the Department of Financial Services in the Ministry of Finance (MoF) should submit an explanatory note to Parliament and provide a listing of large volume NPA cases and where these are at various stages of resolution, recovery or in court.
Chanda Kochhar, Managing Director of ICICI Bank, is now on voluntary leave because allegedly her husband benefited financially as a quid pro quo for ICICI’s loans to Videocon. Venugopal Dhoot is the promoter of the Videocon group, which includes listed companies. Specifically, ~35 billion was loaned to Videocon by ICICI as part of a total loan of ~200 billion. In exchange for this loan from ICICI Videocon has been reported to have invested in companies owned by Ms Kochhar’s husband and then exited at valuations which were highly profitable for the Kochhars. Belatedly the ICICI Board has requested former Supreme Court judge B N Srikrishna to look into the allegations against Ms Kochhar. If her husband did make illicit financial gains, Mr Dhoot cannot but be an accomplice. As of now, the Securities and Exchange Board of India (Sebi) has not put the Videocon group under sufficient regulatory scrutiny.
On a broader note, on February 12, 2018, RBI made it mandatory for banks to classify loans under separate special mention accounts (SMAs) as per guidelines titled “Resolution of Stressed Assets — Revised Framework”. Banks have been directed to recognise non-payment of interest or principal within a day after the due date under the first of these three SMA categories. According to MoF and NITI Aayog, as per these recently issued RBI guidelines banks have to classify loans on which repayments are overdue by just one day as NPAs. And MoF has suggested that RBI should not ask banks to recognise overdue payments from day one. RBI’s directive has been misinterpreted since Indian banks are expected to merely recognise overdue payments from day one and this norm is similar to practices mandated by the Bank of England and the Federal Reserve in the US.
Government’s line on the mounting NPAs of the banking sector is that it is doing all that it can to help. It is a fact that due to the current government’s efforts the Insolvency and Bankruptcy Code (IBC) was finally adopted by Parliament in 2016. Further, the Insolvency and Bankruptcy Board of India (IBBI), National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) are working overtime to help resolve issues across committees of creditors (CoC), wannabe buyers of defaulting companies and original promoters.
Examples of the hoops and loops through which any resolution and recovery of loans has to be effected are: (a) the Essar Steel case which is pending with the NCLAT and the bidders for it, namely Arcelor Mittal and the promoters of Essar Steel have been classified as ineligible by the CoC since they were deemed to have violated provisions of the IBC; (b) the case of UltraTech Cement and Dalmia Bharat’s bids for Binani Cement with bank creditors reported to be favouring UltraTech’s higher bid is pending with the Supreme Court. Many other NPA cases are meandering their way through the dreary desert sands of endless controversies over valuation-resolution-recovery and court battles (apologies to Rabindranath Tagore). To reduce legal delays at least 5 more NCLTs and 2 NCLATs are required. Retired judges could be requested to serve on the benches of these additional NCLTs and NCLATs.
Establishing a Bad Bank would move problem loans off bank balance sheets on to the books of the Bad Bank,which would then write these off at taxpayers’ cost. A better option is for government to actively help PSBs to resolve and recover the maximum possible of their NPAs and move on quickly. Otherwise, the government would be party to the exceptionalism of Indian PSBs and taxpayers would continue to pay for the lack of due diligence in assessing credit risk and procrastination in recovering huge unpaid debts.