SC's verdict on coal blocks: The real loser is the taxpayer, not the crony capitalist

The Supreme Court verdict quashing 214 coal blocks allocated to several steel and power companies between 1993 and 2009 has sent a strong message to crony capitalists to think twice before taking short-cuts for business gains.

But, as in the case of any scams that involves huge losses to the exchequer (the notional loss in the the coal allocation scandal is Rs 1.86 lakh crore and Rs 1.76 lakh crore in the 2G auctions case), the real loser is the taxpayer, the common man.

The economic impact of the SC ruling cancelling most of the coal blocks will put large sums of bank money lent to companies at big risk at a time when India’s banks are struggling to tide over the existing bad loan trap.

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WHAT’S AT STAKE

As Firstbiz noted before , Indian banks, mainly state-run lenders, have lent about Rs 2.65 lakh crore, until June 2014. Apart from that banks’ exposure to power companies, which too will get partly affected, stands at Rs 5 lakh crore.

Not all of this money will get impacted since the exposure comprises money lent to distribution companies and firms that are not allotted coal blocks as well.

Besides the direct loan exposure to coal-related companies, there is also the chunk of restructured assets from iron, steel and power sectors, which is about Rs 80,000 crore that comes under pressure following the court verdict.

This isn’t the first time SC whip on alleged wrongdoings of the UPA government has raised concerns among the banks. In early 2012, banks faced a similar plight when SC quashed 122 2G spectrum licences granted by the UPA-government on the ground that they were issued a “totally arbitrary and unconstitutional” manner. Banks’ exposure to 2G loans was much less, at about Rs 10,000 crore.

THE LIKELY OUTCOME

Since the apex court has quashed the block allocations, the government will now need to work out a new mechanism to re-allot the coal blocks. In the time that such a mechanism is worked out, coal blocks are allocated and finally the production begins, there is a frightening gap and that’s where the fresh stock of bad loans will shape up.

Any stress in the cash flows of companies, arising out of delays in production, will result in repayment delays to banks.

This can push the loans to non-performing assets (NPAs), apart from adversely impacting the fate of loans of steel and power companies currently being recast by banks.

Under RBI norms, for a loan that turns NPA, banks need to set aside anywhere between 20 percent to 100 percent in the form of provisions, and 5 percent for a newly restructured loan. This impacts their profitability and financial health.

The apex court judgement can also derail the ongoing attempts by the banking regulator to set things right in the financial system by tackling bad loans and controlling misuse of loan recasts. The possible, but unintended, outcome of the SC verdict will be significant additions to the sticky asset pile of banks and more strain on their finances.

This would also mean that the capital needs of public-sector banks will rise further. Banks already require substantial capital to meet the Basel-III norms. The government, struggling to bridge its fiscal deficit, may not be in a position to meet the demand for higher amount of capital for banks. The inability of the government to meet the banks’ capital needs will produce more sick banks.

Banks deal with public money, and thus, are the guardians and backbone of any economy. Going by the data released by the Reserve Bank of India, banks are sitting on stressed asset pile of over Rs 8 lakh crore ie. 14 percent of the total outstanding loans given by them so far till June.

Thus the cost of tackling the crony capitalist will finally be borne by the common man, in one way or other.