An Indian Express report citing Reserve Bank of India (RBI) data, made an interesting headline on Monday (1 October)-- In four years, between 2014 and 2018, banks’ write-off over seven times recovery. According to the story, “21 State-owned banks ended up writing off Rs 3,16,500 crore of loans even as they recovered Rs 44,900 crore written off on a cumulative basis”. Add to this an interesting comparison the write-off figure is twice the projected budgetary expenditure on health, education and social protection for 2018-19, at Rs 1.38 lakh crore. It is easy to relate the four years mentioned here as the years of Narendra Modi-led NDA government. Now, while the write-off/recovery data is accurate, the figures need to be seen in the larger context.
To begin with, there is an obvious danger in comparing the loan write-off figures and the recovery figures for the said period because the ongoing write-offs are part of a major clean-up process that was pending for a long time. The situation had reached a tipping point of a major banking sector crisis when the clean-up began in 2014-15. As a result, the non-performing assets (NPAs) spiked sharply and banks resorted to large-scale loan write-offs, many of which were technical write-offs. This means that banks still had the option to recover the money either through liquidation or improvement in cash flows of the firm.
On the other hand, recovery figures are on the cumulative stock of written-off accounts over years and depend on the present cash flow conditions and economic scenario. Recovery from written-off accounts will always be difficult but had the banks not done the clean-up, the problem would have escalated to crisis proportions. Remember, banks need to make significant provisions every time they need to tag an account to NPA or write-off one.
In other words, the NPA/write-off figures post-2014 will look big because of the identification of the stressed assets and aggressive clean-up. The GNPA levels of scheduled banks have galloped from Rs 2 lakh crore in 2013-14 levels to around Rs 10 lakh crore now, as a result of this.
Similarly, the recovery process was slow and the banking system has recovered close to Rs 45,000 crore from written-off accounts alone. But, if one look at the total recovery figure between 2014-18, it comes to around Rs 2,57,979 crore from all bad/written-off accounts.
To clean-up and restore the health of books, banks were left with no options but to tag problematic accounts as NPAs and write-off wherever necessary. This surgery was unavoidable to avert a major banking crisis. Both the Narendra Modi-government and the RBI under both Raghuram Rajan and Urjit Patel deserves credit for initiating the clean-up process.
As this writer argued in an earlier column, most of the NPAs originated during the UPA rule. There were cases of loose lending, political intervention in banks’ business decisions and adding to the woes, the rocket speed economic growth vanished to give way to prolonged slowdown post 2008-09.
In fact, much of the damage to the banking system could have been prevented during the UPA-era. Back then, the banking system, with 70 percent of the assets under government control, had to religiously follow the unofficially official diktats both during UPA I and II and give away the money. This led to banks being infected with the NPA illness' to its present critical state, all under the watch of the Congress government.
The Congress could have corrected the problem, but no one acted because state-run banks were deemed to be piggy banks of politicians. Some bankers even received kickbacks ranging from something as small as a watch or a gold ornament to a few who got promises of post-retirement berths.
In fact, there was hardly any need for political nudging to public sector bankers who opened their doors to unworthy borrowers; they were willing anyway. The high economic growth phase, as former RBI governor Raghuram Rajan said, had made most bankers blind about hidden future risks. They merely looked at past performance of companies and extrapolated it to the future to decide on loans. Also, they expected the then near double-digit economic growth to continue forever creating enough cash flows for all firms to pay back loans. In many instances, most bankers only looked at the names and sanctioned loans -- Vijay Mallya is one example.
At this juncture, the Insolvency and Banking Code (IBC ) has already begun to prove to be an effective tool to tackle large-scale NPA-cases in a time-bound manner. This gave the much-needed confidence to the banking system that recovery processes will not get stuck in courtrooms for decades and that resolution is possible.
The political will to initiate the NPA-clean up and the IBC was missing for long but now it has happened. Beyond political blame games, if one looks at long-term India is on course to strengthen its banking sector and by digging out the dirt off the books, the regulator has just averted a mega banking crisis. That, however, of course comes with a price. Of course, the write-offs and NPA classifications will lead to pain on the books of banks but will strengthen them in the long-term
Updated Date: Oct 01, 2018 14:34 PM