It will amount to playing ducks and drakes with the economy if the Centre decides to be soft with public sector banks (PSBs) and even private sector banks while dealing with their mounting NPAs. They must be made to realise the importance of lending prudence in running the banking institutions. Providing operational flexibility to central PSUs to take over troubled projects as part of the its strategy to quickly get rid of mounting NPAs will not be a lasting solution to the problem. It is a commonplace knowledge that lack of due diligence, proper vetting of projects, their monitoring and non-serious way of recovering the money lent play a critical role in creating stressed assets. This, however, does not mean that Central Public Sector Enterprises (CPSEs) should not take over troubled projects. Some time back Prime Minister Narendra Modi had deliberated on the issue at a high level meeting. The meeting had been attended by Finance Minister Arun Jaitley, Cabinet Secretary PK Sinha and other senior officials. The meeting had discussed the steps being taken to reduce NPA including mechanism of transfer of bad assets to PSUs for turning them around.
It is in order to ask the banks to identify some of large NPAs in various sectors, but they should also be told to explain how the loans which were good for so many years turned bad ones and they did come to know about that only when repayment cycles were disturbed. It is strange that big corporate houses first make the most of tax payers’ money and thereafter start defaulting on repayments, while the small and medium borrowers are harassed beyond imagination if they are unable to pay even one EMI on time. Therefore, the concerned ministries must be vigilant about the role of PSBs while working out faster resolution mechanisms or takeover by the state run firm in some cases. Some of these assets have potential to be revived either by some changes or handing over to sector related PSUs for operating these and turning them around, provided intentions are good and well-meaning. Toxic loans of PSBs rose by over Rs 1 lakh crore to Rs 6.06 lakh crore during April-December of 2016-17, the bulk of which came from power, steel, road infrastructure and textile sectors. Gross NPA of PSBs nearly doubled to Rs 5.02 lakh crore at the end of March 2016, up from Rs 2.67 lakh crore at the end of March 2015. Total toxic loans have now hovering over Rs 8 lakh crore.
Banks must be asked or encouraged to resolve NPAs through settlement schemes or sell bad loans to asset reconstruction companies and welcome any scrutiny by investigation agencies. Any hasty and ill-conceived move aimed at cleaning balance sheets of the state- owned banks and expediting fund raising via markets to meet the global Basel III capital adequacy norms will bounce back. It will be disastrous for the economy and the health of banking sector if the banks are allowed to raise the much needed funds from the capital market as envisaged in Indradhanush plan, reducing burden on exchequer. As per the Indradhanush plan, public sector banks need to raise Rs 1.10 lakh crore from markets, including through follow-on public offers, to meet Basel III requirements which kick in from March 2019. This will be over and above Rs 70,000 crore banks will get as capital support from the Central government. Of this, the government has already infused Rs 50,000 crore in the past two fiscals and the remaining will be pumped in by the end of 2018-19.
SBI has already taken board approval for raising up to Rs 15,000 crore through various means, including public offer and overseas issuance of shares, during the current fiscal. The funds will be raised either through follow-on public issue, qualified institutional placement, rights issue, private placement, Global Depository Receipt, American Depository Receipt or a combination of these. In the Budget 2017-18 speech on February 1, Finance Minister Arun Jaitley announced capital infusion of Rs 10,000 crore for the current fiscal. “In line with the Indradhanush road map, I have provided Rs 10,000 crore for recapitalisation of banks in 2017-18. Additional allocation will be provided, as may be required,” Jaitley had said in his Budget speech.
Needless to say the banking system in India is facing the challenge of bad loans. Even though interest rates are benign, credit offtake has remained at historic lows, clearly pointing out that the biggest problem the economy is facing is stressed assets. Banks must not be allowed to take hair cuts along with promoters of the troubled projects, as such hair cut is already being taken by way of huge provisioning in balance sheets of the banks quarter after quarter. The large share of advances undergoing resolution through various schemes on resolution of stressed assets, especially the strategic debt restructuring (SDR) scheme, is also a matter of concern. As on December 31, 2016, 72 per cent of the debt continues to be classified as ‘standard’ advance on account of the applicability of the standstill clause on asset classification under the SDR scheme. Time to act fast and prudently. (Series on NPAs conclude)
(The writer is an independent commentator on socio-political and economic issues. Views expressed are his personal)