Govt banks wrote off Rs 59,500 cr last year: Why the taxpayer should worry

India’s 27 public sector banks (PSBs), which constitute 70 percent of India’s banking sector, have written off Rs 59,547 crore in fiscal year ended March 2016, going by the information given by minister of state for finance, Santosh Kumar Gangwar, in Parliament on Tuesday. What does it mean? These are the cases where banks have thoroughly failed to make any recovery from the borrowers, largely corporate clients. In other words, Rs 59,547 crore of depositors’ money has vanished in thin air. Remember, in the last three years (FY13, 14 and 15) banks had together written off Rs 1.14 lakh crore. [caption id=“attachment_2863088” align=“alignleft” width=“380”]  Reuters[/caption] This means in just last one year (FY16), PSBs wrote off more than half of the combined loan amount they did in last three years. Of the total loans written off, the country’s largest lender State Bank of India (SBI) alone accounts for Rs 15,763 crore. It is followed by Punjab National Bank (Rs 7,340 crore), IDBI Bank (Rs 5,459 crore) and Canara Bank (Rs 3,387 crore). According to the minister, 20 nationalised banks have cumulatively written off bad debt worth Rs 38,674 crore, while the same for SBI Group was Rs 20,873 crore. Among the other PSU banks, Indian Overseas Bank (Rs 2,578 crore), Bank of India (Rs 2,374 crore) and Allahabad bank (Rs 2,097 crore). This information is significant since the write-off numbers aren’t normally made public. As per the statute, RBI is prohibited from disclosing the borrower wise credit information. With huge loan write-offs turning an annual affair, the depositors and taxpayers should get worried. Why? Banks have to take huge provisioning hit when they do this, which severely impacts their profitability. Government banks survive on annual capital infusion from the government. In other words, the taxpayers money is used to bail out these banks. Hence, when these banks write off large chunk of loans, it is the taxpayer which is ultimately taking the hit. In the last nine years, the government has infused Rs 1.18 lakh crore in state-run banks, including the Rs 23,000 crore infused so far this fiscal year. SBI has received the largest pie (Rs 29,000 crore). Has these huge capital infusions translated into efficient use by these lenders? Empirical evidence suggests otherwise. For decades, state-run banks have epitomised inefficiency and vulnerability to the corporate-political nexus, giving room for cronies and crooks to loot public money. The total gross non-performing assets (GNPAs) of Indian banks currently stand at Rs 6 lakh crore, of which over 90 percent is with PSBs. If one combines this with the restructured loan stock, the total stressed assets in the banking system stands at 11-12 percent. The recent bank loan clean up exercise initiated by RBI governor, Raghuram Rajan has resulted in many skeletons tumbling out of banks’ cupboards. Logically, the state-run banks have been the worst hit. In the last two quarters alone (September-March), these lenders have reported Rs 2.26 lakh crore NPAs in public. The question arises. Why these NPAs were not reported all these years? Did it take the RBI to go for the ultimatum (March, 2017) to prompt banks dig out the dirt merrily hidden under their carpets? Crony promoters have been looting the banking system for years making full use of the corporate-political nexus. According to government data, the total number of wilful defaulters of Public Sector Banks (PSBs) escalated from 5,554 to 7,686 for the period December 2012-December 2015 with the amount involved more than doubling to Rs 66,190 crore from Rs 27,749 crore. Wilful defaulters are those promoters who wouldn’t pay back to banks even if they have the ability to do so. Also, banks merrily pushed loans to the restructured loan basket at the first sign of trouble and retained them as standard assets. Cronies thrived in these technical adjustments since they were still eligible to borrow even more from the same banks or other bank unless tagged as defaulters. It was Rajan who insisted that banks shouldn’t postpone today’s problem to tomorrow and worsen it. The RBI withdrew regulatory forbearance on restructured loans, making it mandatory for banks to make provisions on restructured loans at par with bad loans. This forced them to set aside 15 percent of the loan amount as provisions if they decide to go for fresh restructuring. Earlier, banks used to conveniently push many stressed loans, especially in the infrastructure segment, to the restructured loan category to prevent them from slipping into the NPA category. Rajan also insisted banks to recognise stress in their portfolio early and classify them into special mention accounts (SMAs) depending on the period of repayment delay. Banks were asked to form Joint Lenders’ Forum and address the problem as a group. In effect, the RBI forced banks to have a clear road map to clean up their balance sheets. He set a deadline of March 2017 for banks to clean up their books. Is the pain over? It may not be the end of the bad-loan story yet. Even within the loans that are considered standard (where repayments happen promptly), there is a disturbing trend. That is the rise of Special Mention Accounts-2 (SMA-2), where the repayments are overdue for 60 days. This is an issue Firstpost flagged last year. A loan is tagged an NPA if interest repayments do not take place in 90 days. The SMA slabs were brought in by the RBI to detect early signs of stress in the banking system. The recent rise in the SMA-2 means that there are more good loans that are waiting to turn bad if support doesn’t come from economic recovery. The short point is this: When PSBs do huge write-offs, the taxpayer is taking the real hit. Such bail-outs cannot go on forever.