The October-December earnings of state-run banks mark the biggest ever bad loan clean-up drive ever witnessed by India’s banking industry. It’s certain that more skeletons will fall out of the closet in the coming quarters since banks will have to finish disclosing all bad assets by March 2017. Banks like Bank of Baroda and IDBI Bank have reported their biggest ever quarterly losses in the December quarter as they recognised more bad assets.
The plight of these state-run banks, which top the non-performing assets (NPA) list, would surely give sleepless nights to finance Minister Arun Jaitley, to work out his budget math, since the capital requirements of PSBs will increase manifold as they need more money to set aside against bad loans. State-run banks account for 70 percent of the market and carry 90 percent of the bad loans in the industry. The already announced Rs 70,000 crore capital infusion is too little. The government needs to infuse substantially higher amount.
Pulling up banks to declare their bad loans is certainly a good move since this exposes the hidden rot in the banking system. But, when it comes to recovery of the money that has already gone bad, this alone wouldn’t do. How the government can recover the NPAs? To answer this question, one needs to understand the bad loan picture first.
Of the total bad loan stock of Rs 4, 43,691 crore crore in the banking industry, about 65-70 per cent is from the corporate sector. Going by the RBI’s December Financial Stability Report (FSB), credit to top 100 large borrowers (corporate borrowers) constituted 27.6 percent of the credit to all large borrowers and 17.8 percent of the credit of all banks.
The share of Gross NPAs of these borrowers in total GNPAs of all SCBs increased sharply from 0.7 percent in March 2015 to 3.1 percent in September.
“The sharp increase in the share of NPAs of large borrowers to the total GNPAs from 78.2 percent in March to 87.4 percent in September is a major concern to the lending institutions and other stakeholders,” the RBI said.
This means the government has to crack the whip on corporate promoters to recover the existing chunk of bad assets. A good bankruptcy law can help address future cases of default. But, what about the existing stock of bad loans?
Take the example of liquor baron Vijay Mallya, whose grounded airline kingfisher owes over Rs 7,000 crore (the actual amount will be more including the interest component) to a clutch of 17 banks, including State Bank of India (SBI).
Even after four years (Kingfisher loan turned NPA in 2012), no bank has managed to make any meaningful recovery from Mallya despite having all the powers vested with them by the RBI, including the wilful defaulter tag -- once described by governor Raghuram Rajan as a powerful weapon for banks. The question is what is the invisible force that has helped Mallya to take on 17 large banks in the country for so long? The answer should be obvious.
Clearly, Mallya has cleverly used the legal system to his advantage to delay the loan recovery by banks. Before SBI finally tagged Mallya as a wilful defaulter in November 2015, the liquor baron had managed to force Kolkata-based United Bank of India to reverse its decision (to tag Mallya as wilful defaulter) getting a favourable court verdict on technical ground. The court ruled in favour of Mallya citing that instead of having three members, the grievance redressal committee of the bank had four members.
Theoretically, the wilful defaulter tag can be a nightmare to any promoter, since that makes him an outcast from the whole financial system with no leeway to avail funds from any other institution. Nor the promoter can be a part of any other company until the tag is lifted. But, none of this has worked in the Kingfisher case for banks to get their money back. Kingfisher is just one case.
There are several others where the rich and powerful have cleverly manipulated the banking system and judicial loopholes in the system to their advantage, whereas the ‘small and weak’ (retail borrowers) typically don’t have the wherewithal to take on banks with long legal battles and hence get caught.
Rajan, has openly criticised Mallya when he said loan defaulters shouldn’t flaunt their wealth in public as this can send a wrong signal. “If you flaunt your birthday bashes even while owing the system a lot of money, it does seem to suggest to the public that you don't care. I think that is the wrong message to send,” Rajan said on the sidelines of the World Economic Forum.
But, talks alone wouldn’t help.
Looting taxpayers’ money
The hard fact is that with the RBI stipulating banks to aggressively disclose bad loans and provide for these assets would mean these banks will take a severe hit on their profitability and market valuations, thus eroding shareholders’ wealth. Higher capitalisation necessitated for PSU banks would mean taxpayers’ money is used to bail out these banks.
If the government is simply bailing out banks without making efforts to recover money from corporate defaulters, that equals to letting crony promoters loot taxpayers’ money. It needs to clamp down on the corporate wilful defaulters and recover money. If Subrata Roy (of the Sahara group) can be put behind bars, there is no reason why the same can’t be done with a wilful defaulter of Rs 7,000 crore loans to some 17 banks, who have committed financial irregularities by diverting bank funds to other group activities, dragged lenders to courtrooms instead of repaying money and continues to flaunt his wealth challenging the banks.
The point is this: If this government shows the guts to act on Mallya that would send a strong message to other wily promoters that there is no more free-lunch in this country with taxpayers’ money. Else, it will have to answer the same taxpayer why his money is used to bail out Sarkari banks looted by crony promoters.
(Data support from Kishor Kadam)