Post demonetisation, banks were flush with funds and yet credit did not pick up. The blame was on the surging non-performing assets (NPAs) that killed the risk appetite of banks. The whole country is now aware that NPAs of corporate borrowers is the villain of the piece. Banks for once stopped blaming the priority sector for the unsustainable level of NPAs. Public sector banks (PSBs) dominate the NPAs and therefore the finance minister has announced a recapitalisation of the order -- never seen before at Rs2.11 lakh crore. To call these reforms is a travesty of judgement. The average taxpaying person has to swallow the poison. It has the potential for moral hazard.
NPAs are integral to banking operations. No lender is immune from bad loans. The World Bank Development Report has recently published some data on non-performing loans as a percentage of total loans. (see the table and graphs below) In a dynamic and growth oriented economy, NPAs do occur in spite of every prudence and this should be given a treatment conducive to reducing their impact. Global economic pressures, inflation and policy drifts in the domestic economy make their liberal contribution and the solution lies with the vigilant banks.
Percentage of Non-performing loans to total loans
Greece takes the topmost slot with 36% NPA ratio while the next is rest of South Asia with India in the close to double digits. High-income economies fared significantly better barring the recession battered years during the last 15 years. Countries that received aid from international agencies have high NPA ratio with Europe and Central Asia no exception. India that performed well on this front till 2012 deteriorated year after year.
Risks of loss resulting from inadequate or failed internal processes, people and systems, broadly classified as operational risks enhanced. Strategic and reputational risks also increased with Mallya-like cases surfacing and just 12 corporate undertakings contributing to more than a third of the total bad debts.
The regulator says that it has been doing all that it could to control the problem, like corporate debt restructuring (CDR), special treatment to the Special Mention Accounts (SMA), cleanup of balance sheets, and higher provisioning norms during Raghuram Rajan regime as Governor, of Reserve Bank of India (RBI). Yet, the Financial Stability Report (2017) mentioned that ‘the banking stability indicator worsened between September 2016 and March 2017 due to deterioration in asset quality and profitability,’ notwithstanding the strong fundamentals of the macro economy. Financial stability has critical influence on price stability and sustained growth. It facilitates efficient transmission of monetary policy actions. More importantly, it safeguards the depositors’ interests and ensures the stability of the financial system.
While the lately introduced Insolvency Bankruptcy Code (IBC) has a potential of success, it has no immediate consequence to remedy the situation and even the recent amendments to the code will have to wait for results to happen at least for a year as the resolution process itself has in-built mechanism to extend for 270 days.
While the owner has all the responsibility to replenish the capital, there is demonstrated failure on the part of Government of India performing the dual role of regulator and owner in taking timely corrective measures. The owner is blindfold to the reality. Ever since universal banking has been introduced, collateral damage has been done with the sale of non-banking products like insurance, mutual funds with banks incentivizing the staff for such effort, taking preference over the traditional banking products, viz., deposits and credit. Due diligence of firms, their partners, directors has become a casualty. Exposure norms have been redefined.
Adding fuel to fire is the Basel III regulations that redefined the Expected Loss.
Based on these calculations, PSBs in India require capital infusion of a near Rs5 lakh crore due to their level of NPAs standing at over Rs7 lakh crore as at the end of FY2017. Indian Banks thus had adequate warning to comply with additional capital requirements by 1 April 2018. Can banks find this capital? If not, what lessons can we learn from another round of bank bailouts with taxpayers’ money? Some years ago, there was a proposal in RBI to set up a Precautionary Marginal Reserve Fund, which could have been used to deal with capital erosion. More on that in the second part.
(Dr B Yerram Raju is an economist and risk management professional. The views are personal.)
pyar ka bandhan, janam ka bandhan chhute na...
Step 1: Government will issue Bonds of Rs 2 lakh Crore and banks will pay this amount to subscribe Rs 2 lakh crore. (Government will get Rs 2 lakh Crore).
Step 2: Banks will allot Shares to the Government for the same amount and Government will pay Rs 2 lakh crore to the banks. (Banks will receive back the amount as Capital).
Up to this level of the transactions, any person with a minimum education of some basic arithmetic and common sense will agree that the Government is not paying anything to the Banks.
But, some liabilities are there for both of them. The Government must pay interest on Bonds issued by them in favour of banks. Banks are also liable to pay the dividend to Government against the shares issued by them. If you compare, the government is marginally looser and as per the Secretary Finance the amount is negligible and as such would be almost ‘fiscal-neutral’.
If our Finance Secretaries statement as published in all important financial newspapers, why we are spreading ‘wrong-information’ or ‘mis-information’ that so-called Taxpayers’ Money will be used to recapitalise the Banks.
The line ‘’average taxpaying person has to swallow the poison' is thus completely out of context. In the news and editorials published by the financial newspapers the word ‘Taxpayers’ are used and the common people (and perhaps the authors of such stories) means to say Income Tax Payers with a clear undertone that country is being run with the amount of tax paid by the Income Tax payers only. They forget that 99.99% of the population is paying taxes to Government in the form of ‘Indirect Taxes’ (now GST) and its volume is much higher than the Income Tax paid by some privileged few. A person living ‘below the poverty line’ is also paying taxes to the government.
1. Sweden/Iceland model for making the banks pay for bad decisions and not the tax payers.
2. Western/Japanese model to bailout banks through State Intervention.
To follow the harsher method the Govt should be least corrupt and should have political will.
But most Countries will choose softer option to kick the can down the lane thereby encouraging bad behaviour from banksters and the cronies.