Factors That Triggered Higher Bank Charges:

1. The Problems of NPAs:

The Indian banking sector is going through a severe crisis. Losses arising out of NPAs have just multiplied over the years making it extremely difficult for the banks to carry on their daily operations. Banks continue to remain under-capitalized with their profits falling, thereby reducing their credit capacity. This is a major cause of the jobless growth which India is facing today.

As of March 2018, bad loans amounted to over Rs. 10.35 lakh crore and around 50% of these belong to the top 100 borrowers. In fact near 75% of all bad loans are over Rs. 100 crore, indicating clearly that bad loans primarily belong to the top 1%.

It is a known fact that high NPAs are a result of easy loans given to huge corporate bodies without properly verifying the need for such a loan and considering the risks associated with the projects for which the loans have been provided. UPA I and II have often been accused of providing easy loans to its corporate friends which have now turned into NPAs either due to mismanagement of funds (as is the case of Nirav Modi and Vijay Mallya) or due to the 2008 global financial crisis.

While the banks were trying to deal with the growing menace of NPAs, RBI increased the pressure by conducting an Asset Quality Review (AQR) in August, 2015 which revealed that a large number of loans given by the banks were non-performing (even upto 100%) and hidden. Consequently, the RBI made stringent rules for declaring bad loans. The RBI also placed 11 Public Sector Banks (PSBs) under prompt corrective action, restricting their ability to lend and accept deposits, or in effect function. Even the Insolvency and Bankruptcy Code (IBC) has not helped the banks to recover more than one-third of the lost amount.

Hence, the profits have fallen considerably forcing the banks to create other income sources in the name of bank charges.

2. Demonetization

While the banks were trying to deal with the losses and comply with the RBI guidelines, they were subjected to another blow in the form of demonetization in 2016.

A sudden delegitimization of 86% of Indian currency led to a flush of cash deposits in the banks. The employees worked overtime to ensure a smooth transition for the working class. However, the ruling government as well as the RBI failed to take cognisance of the immediate consequence on the banking sector. Apart from an increased operational cost, huge cash deposits increased the interest payments of the banks thereby worsening their already poor profitability.
3. Welfare Schemes:

Apart from the above two factors, another major reason for the reduced profits of the banks is its forceful involvement in the implementation of the welfare schemes launched by the ruling Bharatiya Janata Party (BJP).

Though the BJP has tried to ensure financial inclusion of all through welfare schemes such as the Pradhan Mantri Jan Dhan Yojana (PMJDY), it has proved to be a disaster for the depositors as well as the banks, especially the PSBs. Under the PMJDY, almost 32 crore accounts were opened but they remain non-operational till date. Furthermore, the Aadhar registration and the bank account linking process has led to a huge increase in the operational costs of the banks.
The Impact:

With so much of stress from the RBI as well as the government, the banks are being forced to lash out at the depositors.

RBI issued a guideline in July 2013, directing the banks to levy penal charges in case of non maintenance of minimum balance. Shockingly, a study conducted by Prof. Ashish Das of IIT Bombay revealed that banks were converting no-fee Jan Dhan saving accounts into fee-based regular saving accounts silently when an account holder carried out a 5th debit transaction in a month. This evidently impacts the poorest of poor who are unable to maintain even a minimum balance.

However, revenue from the penalties was insufficient for the banks to cover the huge losses. As a result, the banks have started levying charges on various other transactions since a year.

Depositors are even being charged for banking services which earlier had no charges like changes in address or mobile number, SMS alert service, update of KYC-related documents etc. They are now being charged for cash transactions in their home branches as well. Number of cash deposits and withdrawals, without charge, are limited to five or six times a month and an amount ranging from Rs 10 to Rs 150 per transaction is being charged by different banks. Added to this, there have also been limits imposed on the number of uncharged ATM transactions. The situation is worse for the migrant workers, that form a huge proportion of our labour class, who most often use non-home branches which increases their banking costs.

Even the number of onsite ATMs have reduced across banks, indicating sector wide cost cutting efforts aimed at reducing the depositors’ access to their funds.

An exhaustive list of the charges levied by certain major banks for various services can be viewed  here. Apart from the already high charges, 18% GST is also levied worsening the conditions of the poor.

The assumption that the banks are taking such action in order to recover their losses is verified from the statement of State Bank of India (SBI) Managing Director in September 2017 who said that SBI was planning to raise Rs 2000 crore as a penalty for non-compliance of minimum balance in saving accounts, part of which would be used to compensate the extra costs incurred to banks due to linking of 40 crore savings accounts to Aadhaar.

As of March 2018, Rs. 11,500 crore has been collected by 21 PSBs and 3 private banks as penalties for non-maintenance of minimum balance. At the same time just the PSBs have written off Rs. 3.17 lakh crore of bad loans. Thus, the penalties would only compensate less than 4% of the losses. As a result, levying penalties is nothing but an unnecessary harassment for the poor and the working class who are paying for the mishaps of the corporates and the government alike.

The data relating to the penalties collected by few of the major PSBs and private banks for the non-maintenance of minimum balance in savings account can be viewed here.

The BJP government is not only shifting the burden of the banking crisis onto depositors but is also forcing depositors to subsidize its supposedly pro-people schemes. To squeeze and fleece depositors to compensate for the actions of the largest corporate houses in the country is regressive and unconscionable.

Financial Accountability Network (FAN) – India, that has started a ‘No Bank Charge’ campaign, has discussed this issue with various stakeholders including students, activists, economists among others. Dr Syeda Hameed, former member of the Planning Commission of India, says, “The policy on bank charges is extremely shameful as the burden of the NPA created by the rich and corporates has fallen on the poor, students, muslims, dalit women and men, and other marginalised sections.” Social activist Medha Patkar says, “Bank charges are a loot and they must be scrapped.”

Krishnakant of the Paryavaran Suraksha Samiti, Gujarat says, “Bank charges are bullying by the banks. There is no discussion on the decision of the bank charges. We don’t know who decides these charges. Nobody consults people.”
Anil Kumar Yadav, a Delhi-based delivery executive, says, “If banks can charge on minimum balance then why can’t they do so on maximum balance? I earn Rs. 9,000 a month which leaves me with insufficient balance at the end of the month.”

Like Anil, there are thousands of such working class and poor people for whom banking has become like an expense rather than a saving mechanism. They are being looted for no fault of theirs. This to some extent is forcing them to again move out of the formal financial institutions and depend on the informal sources. It is a vicious cycle that they have been trapped in.

Way Forward?:
The sheer regressiveness of these anti-poor measures is the result of the inability or unwillingness of the government as well as the RBI to fix the issues surrounding the banking sector. It is high time that the government increases its expediture and recapitalize the banks instead of shifting the burden on the poor sections of the society. Stringent, transperant and accountable lending measures should be formulated. Also, efforts should be taken to initiate proceedings against the defaulters.

Only if these measures are undertaken, can the credit flow improve which in turn will improve the banks’ profits and help in the overall economic growth. Otherwise, the cyclical process of bad loans-write offs-auctions-recapitalization will happen again which will worsen  the already bad situation of the poor people.

It is time that the government and the RBI own up to their blunders and pull up their socks to revitalize the Indian banking sector. These charges, fees and penalties are not only unjust but also inadequate for compensating for the huge losses. These regressive measures can in no means be a substitute for the direly needed measures like sufficient recapitalization and reforms in lending and recovery practices. This passing the burden of corporate debts to working people must urgently be stopped.

Related Articles:

1. India’s Non Farm-loan Debts Could Settle All Distressed Farm Loans
2. It’s Not a War on Corruption or Black-Money: De-Monetization is an Extreme Measure to Serve Corporate Elites
3. The 99 Per Cent Failure!

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Delhi: Farm loan waivers by state governments engender heated media debates and thus loom large in public consciousness, while use of government funds to infuse fresh equity into government-owned banks following large defaults by corporate borrowers goes nearly unnoticed.

This is unwarranted, the data show. The scale of the corporate non-performing assets (NPA) problem is of a higher magnitude, and corporate defaults have cost the public exchequer more than farm loan waivers. If recapitalisation of banks is welcomed, a farm loan waiver should be as acceptable.

In the financial year 2017-2018 and to date, 10 state governments have announced farm loan waivers totalling Rs 184,800 crore.

In contrast, the total debt of India’s top 10 corporate borrowers alone was nearly four times that amount, at Rs 731,000 crore as of March 2015, and of the top 12 NPAs nearly twice, at Rs 345,000 crore.

Data show that the percentage of impaired loans in agriculture has been far lower than that in industry.

Expensive for the exchequer
Total gross bank credit (the amount in loans disbursed to companies or individuals from the banking system) was Rs 71.5 lakh crore as of March 2017, and Rs 77 lakh crore as of March 2018, according to a Reserve Bank of India (RBI) report in December 2018.

Of this, agricultural credit was Rs 10 lakh crore for each period, making up a 13-14% share, on average, in overall bank credit.

Total credit to industry was at Rs 26-27 lakh crore during each period, amounting to a share of 35% in overall bank credit. Within this, loans to large borrowers–who the RBI defines as receiving loans larger than Rs 5 crore–amounted to Rs 22 lakh crore each year.

More specifically, total credit to the top 10 corporate borrowers as of March 2015 was Rs 7 lakh crore, accounting for 10-14% of total bank credit, and 27% of total credit to industry, as per a research report by international financial services company Credit Suisse.

For the same period, the total credit to agricultural and allied activities was Rs 7.7 lakh crore–the entire agriculture sector owed the banking system the same amount borrowed by the top 10 Indian corporate borrowers.

Total gross NPAs in Indian banking were Rs 8 lakh crore and Rs 10.3 lakh crore as of March 2017 and March 2018, respectively, according to RBI data.

The share in NPAs of large borrowers has been increasing over time, with a share in total advances (lending by banks) of 40%, and a share in total stressed assets (including NPAs, restructured loans and assets written-off by banks) of 70% at the end of March 2017.

Share Of Large Borrowers In Total Advances And Indian Banks’ Stressed Assets

Source: Reserve Bank of India, April 2018

Among NPAs in the banking sector, the top 12 which make up approximately 25% of total NPAs were identified and referred to the National Company Law Tribunal (for resolution and recovery) by the RBI in 2017. Of these, four have been resolved within a year with about 52% of their dues recovered. This recovery represents only 14%, or Rs 48,300 crore, of the total Rs 345,000 crore owed from all 12 NPAs. Thus, about Rs 3 lakh crore remains outstanding from just eight corporate NPAs–nearly double the total farm loan waivers announced by the 10 states.
 

Source: Insolvency and Bankruptcy Board of India Quarterly Newsletter, Oct-Dec 2018

Upon further research, we see that for a group of other large exposures (or total loans to a particular entity, for our purposes defined as higher than Rs 1,000 crore), recovery of dues has been to the extent of 30%.
 

Source: Compiled from Insolvency and Bankruptcy Board of India Quarterly Newsletters

The amount written off by banks for just five corporate NPAs is thus Rs 11,106 crore–more than the combined farm loan waivers in two states, Chhattisgarh and Andhra Pradesh.

Farm loans for corporate activity in farming sector and to large borrowers
While popular opinion on farm loan waivers vilifies the poor and marginal farmer, small farmers benefit the least from agricultural credit since they borrow largely from informal sources such as moneylenders. Therefore, these farms do not benefit from loan waivers announced by governments that are not applicable to non-formal sources of credit.

Agricultural credit in India is now mainly large-ticket (of larger loan amounts) and goes towards corporate activity in the farm sector, as data show. The share of high-value loans (above Rs 10 lakh) increased from 4.1% in 1990 to 23.8% in 2011 of all ‘direct’ agricultural credit, which goes directly to people/institutions directly involved in farming and allied activities (as opposed to, for instance, funding for further lending by cooperatives or to state electricity boards for provision of electricity to farmers). The share of small loans (Rs 2 lakh) decreased from 92.2% to 48% in the same time period.

Sources: Economic Survey, 2014-15 and Review of Agrarian Studies, Feb-Jun 2014)

The RBI revealed that public sector banks (PSBs) had handed out Rs 58,561 crore to 615 accounts in agricultural loans in the year 2016, in response to a Right to Information application filed by The Wire. This averages out to more than Rs 95 crore in agricultural loans to each account.

It is actually corporate borrowing that has spurred the growth of agricultural credit in India, thanks to the RBI mandate that 40% of banks’ lending (or ‘adjusted net bank credit’) must go to to priority sectors of the economy, with a sub-limit of 18% for agriculture. Strong growth in bank credit to industry and other segments of the economy has, as a by-product, led to the growth of agricultural credit.

Not only is the growth of agricultural credit mainly in the big-ticket segment, two other things stand out: Most agricultural credit is disbursed just before the end of the financial year for banks to meet their priority-sector lending targets–and is as such off-season credit that does not really help farmers–and an increasing and large proportion of agricultural credit is disbursed via bank branches in urban India, according to a paper by R. Ramkumar and Pallavi Chavan published in the Review of Agrarian Studies in 2014. Agriculture-related disbursals for meeting targets, which largely go to corporate activity in the farm sector, do not help the real small farmer.

The increasing and large percentage share of big-ticket loans in agriculture does suggest that the corporatised ‘farmer’ is enjoying the benefits of the way the regulator has incentivised the banking sector. On the other hand, the small and marginalised farmer now depends heavily on non-institutional and expensive forms of credit. As the chart below shows, over-dependence on usurious finance for small/marginal farmers is reflected in the very low (14.9%) share of access to institutional credit of farmers with land holdings smaller than 0.01 hectare.

Why farmers’ situation is more precarious than big businesspersons’
A key underpinning of bankruptcy procedures is the limited liability clause that protects the assets of promoters unless explicitly pledged. Corporate bankruptcy, therefore, is a simultaneous process of cleansing bank balance sheets and a mechanism allowing optimal risk-taking by entrepreneurs. Entrepreneurs can come out of bankruptcies with their personal assets unscathed, whereas a farmer who loses a crop–due to unfavourable weather conditions or a price crash–can lose everything.

A farm loan waiver is a sector-wide extinguishing of loans mandated by the government, usually after an election to fulfill a poll promise, with the exchequer compensating banks. Although corporate NPAs do not normally entail government obligation (unless NPAs originate in public sector banks or are due from public sector corporations), the exchequer gets involved when conditions warrant that the state must indirectly bear the burden of corporate NPAs by infusing funds into banks–as is happening now in India, and happened in the US following the 2008 financial crisis.

Equivalence can also be drawn when the problem of corporate NPAs repeats itself in the same sectors, implying that banks keep lending to the same sectors even in the absence of structural improvements.

Lack of structural changes
Cases in point are persistent problems in the power and infrastructure sectors. We looked at RBI data on segment-wise performance of exposures of banks to address this question. We analyse two time periods: The position as of March 31, 2001 and then the position between the period March 2009 and March 2013. Contributions to total gross NPAs of the banking sector by large industries, medium industries and agriculture as of March 2001 were 21%, 15.8% and 13.3%, respectively.

Source: Muniappan (2002), RBI Deputy Governor at CII Banking Summit 2002 on April 1, 2002
 

Source: Reserve Bank of India

Of the top 10 borrowers in the Indian banking system, even if one excludes Reliance ADAG and Videocon (the latter does have substantial interests in infrastructure and mining), all others have businesses primarily in pure infrastructure and heavy industries.

Next, for industries (overall) and agriculture, we consider the movement in percentage of total impaired asset ratios between 2009 and 2013. Around 10.2% of all loans to industries were impaired in March 2009 and this increased by 5.8 percentage points to 16% by March 2013 (and the position has only worsened after 2013 as shown by the table). For agriculture, 5.4% of exposure of the banking sector was impaired as of March 2009 and this worsened by 2.8 percentage points to 8.2% in March 2013. As is evident from the data, the percentage of impaired assets in agriculture has been far lower than that in industry.

The then RBI Governor, YV Reddy, in a speech delivered at the National Institute of Bank Management, Pune, on January 6, 2004, had acknowledged that banks followed a sort of rule in lending: Small industry loans at 11%, agricultural loans at 10% and industry loans at 7%.
This means that the credit quality (the principal criteria for judging a company’s creditworthiness or risk of default) of large corporate borrowers is not superior to that of agriculture/priority sector lending. Interest rates charged by banks from large corporate borrowers are therefore incommensurate with the risks involved.  

How policy has played a role
Policy has focused on keeping food prices low for consumers through restrictions on farmers and subsidies to consumers. The average yearly revenue lost by Indian farmers between 2014 and 2016 on account of export restrictions, after deducting the subsidies they received, was Rs 1.65 lakh crore, as per the Organization for Economic Co-operation and Development.

This model of development is no longer tenable, many experts and policy-makers concur. First, India can no longer rely only on exports and must ramp up domestic demand to power its growth. And skewing income distribution away from a sector which employs 42% of India’s workforce will not help. Second, cities are unable to manage the influx of refugees from agriculture, so farms have to be made more productive and remunerative. Third, the Swaminathan/National Commission on Farmers report of 2006 clearly states that India’s food security cannot be achieved through imports, thus emphasizing the imperative of a healthy agricultural sector. Finally, from an ethical point of view, taking care of the big farmer who, unlike the corporate promoter, risks losing personal assets in the event of a default, is as important as taking care of the big businessperson.

In sum, structural problems in both the agricultural and corporate sector must be addressed with equal urgency. Empathising with the corporate sector for its woes while deriding the farm sector for its alleged profligacy is a recipe for pitting town versus country in a battle that no one can win.

(Prasad is a professor at Management Development Institute, Gurgaon and author of Blood Red River; Gupta is a banker with an interest in economic development.)

We welcome feedback. Please write to respond@indiaspend.org. We reserve the right to edit responses for language and grammar.

Courtesy: India Spend.com

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The recent troubles of the public sector banks (PSBs) in India have encouraged the private corporates and their bodies to redouble their call for the privatisation of the Indian banking system. Such demands have come even though it is plain to see that it is the private banks which are far more prone to failure compared to the public sector banks. As many as 36 private banks have failed in India since 1969.

The calls for the privatisation of PSBs also tend to ignore the reasons for the nationalisation of India’s major banks. The fact of the matter is that the private banks were not serving the purpose that the banking system was supposed to serve in a developing country like India.

Private banks were a failure in taking banking services to the rural areas, and in extending credit to farmers and small scale industry. The private banks were also going bust at a phenomenal rate – 736 banks failed or had to be taken over by other banks during the two decades before nationalisation.

It was only after nationalisation, with the expansion of the rural banking network by public sector banks, that there was a major increase in the number of rural and semi-urban banks in India. As Hemendra Hazari pointed out in a recent article :

“In June 1969, before nationalization, there were only 1,833 rural and 3,342 semi-urban offices of the banks. By March 1991, these figures rose to 35,206 rural offices and 11,344 semi-urban offices. Total offices during this period increased from 8,262 to 60,220. Such a massive expansion in bank branches, which to a significant extent reached banking to unbanked sectors of the economy, would not have taken place under private ownership, since private investors are concerned with profits over a relatively short period. It was only the Government which could direct the banks to follow a broader developmental agenda.”

The expansion of the public banking network in rural areas meant that the share of rural branches in the total number of scheduled commercial banks rose from 22 per cent in 1969 to 58 per cent in 1990.

It was nationalisation which allowed the government to direct a share of total credit to sectors that it designated as priority sectors, such as agriculture and small scale industry. These were sectors which were practically ignored by private banks. Post-nationalisation, the share of small scale and other priority sector advances in total credit increased from 22 per cent in 1972 to 45 per cent at the end of the 1980s.

Bank nationalisation also ensured that the banking system remained relatively stable, even when numerous banks in the advanced countries of the West collapsed under the impact of the worldwide economic crisis from 2008 onwards.

This is no accident, and is not just an issue of mismanagement on the part of individual private banks. The point is that a banking system dominated by private banks would be structurally more unstable.

CP Chandrasekhar, Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University outlines the reasons for this in a 2009 paper , in which he traces the roots of the crisis in the US to a transition in the banking structure of that country.

The Glass-Steagall Act of 1933 had erected a wall between commercial banking and investment banking. The system was a highly regulated one, and the banking structure was one based on a “buy and hold” strategy as Chandrasekhar puts it. In simpler terms, this meant that the banks took in deposits and gave out loans, and the net interest margin was the main source of the banks’ returns. The rates of return were relatively small.

This system served the US well during the Golden Age of high growth from the end of the Second World War to the early 1970s, but the regulation posed a contradiction. The banking system was dominated by private banks, and they wanted higher returns comparable to non-banking sectors. Such high returns were not possible as long as such tight regulations were in place, and hence the private banks started clamouring for de-regulation. Once the government responded to such pressures and brought about de-regulation, the banking structure transitioned to an “originate-and-sell” strategy, in which “credit risk was transferred through a layered process of securitisation that created the so-called toxic assets”. The banks ended up engaging in far more riskier activities which were more susceptible to manipulation as well as the vagaries of the financial markets.

Therefore, once it is recognised that the banking system is the core of the financial sector, and that its stability is essential for the good of the economy, it will have to be accepted that banks should function in a highly regulated environment which might earn them relatively low returns.

But that, in turn, would mean that the banking system will have to be public, so that the pressure to dismantle regulations can be avoided.

“So capitalism appears to need a publicly owned banking system for its own proper functioning,” says Chandrasekhar.

Courtesy: Newsclick.in

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India’s banking system, which was robust enough to withstand the financial crisis of 2008, is facing a crisis today. The banks, particularly the public sector ones, are burdened with huge amounts of non performing assets (NPAs), which are threatening the viability of the banking sector.
In the last three years, under BJP rule at the center, the NPAs of the banks have tripled – from Rs. 2.3 lakh crores to Rs. 6.8 lakh crores. Currently, the NPAs of public sector banks stand as high as 11% of their total advances.

Non-repayment of loans by some of India’s biggest corporate houses is the major cause of this huge accumulation of NPAs. According to the chairman of Parliamentary Accounts Committee, K V Thomas, a handful of big corporate houses account for 70% of the NPAs of the banks.

The Finance Minister Mr. Arun Jaitly, tried to absolve himself and his government of all the blame, claiming that the NPAs are a legacy problem. According to him the loans that were given during UPA government have turned bad and are accumulating as NPAs today.

While it is true that the UPA government compelled the public sector banks to dole out loans worth lakhs of crores to a handful of corporates, the BJP government is not far behind. It is helping the same corporates in continuing to default on the repayments – with the aid of loan refinancing and restructuring schemes introduced by the Reserve Bank.
In the last three Modi years, public sector banks have been pressured to restructure bad loans (under various schemes of RBI) worth Rs. 3.5 lakh crores belonging to the corporate houses.. These restructuring deals simply meant that the companies get new loans to pay off their old loans, which they have already defaulted on. These schemes also involve changing the terms of payments in favour of the defaulting corporates.

The infamous case of Vijay Mallya defrauding the public sector banks, is all too well known. Less publicised are those of Modi’s own crony capitalists. It is estimated that companies controlled by Adani, owe a debt of Rs. 72,000 crores mostly to public sector banks.
Since 2014, two power companies controlled by Adani’s firms have been extended loan refinance worth Rs. 15,000 crore by the public sector banks. This was done when both the companies’ earnings -before tax- were not even enough to cover the interest cost on the loans they have taken. In this sweetheart deal, the previous defaulted loans were replaced with new loans and loan repayment date was extended by one more decade. Additionally, a moratorium on interest payments was given for a considerable period, meaning that in this period these two firms need not pay even the interest amount.

Similarly, after Modi came to power, Mr. Mukesh Ambani’s Reliance Gas Transport Infrastructure Ltd. (RGTIL), was given a loan refinance of Rs. 4,500 crores and an extension of payment period by more than a decade.           

According to Arun Jaitly, most of the NPAs and bad loans are due to projects in power, infrastructure, mining and steel sectors – which are owned by the large corporates like Reliance, Adani and Vedanta. Let us not forget, these are the same companies (remember Vedanta’s land grab in Orissa), whose factories and plants were set up by grabbing thousands of acres of land belonging to famers and tribals.

These billionaire promoters and owners of the companies should have been compelled to transfer the shares (equity) of these companies, to the public sector banks, in lieu of the unpaid loans. Or, they should have been made to inject fresh capital in to the defaulting companies. Refinancing of the loans, extension of payment schedules and moratoriums on interest payments – without placing any responsibility on those who control the companies are bound to bring even heavier losses to the banks in the coming days.

The government seems to think that Mukesh Ambani, with net worth of more than Rs. 1.5 lakh crore rupees needs assistance in paying back the loans of his companies, while the farmers of this country are given no recourse after severe droughts and crop losses. Desperate after years of draught, farmers from Tamil Nadu and elsewhere have been agitating for months for loan waivers. Their appeals to the central government have fallen on deaf ears. Modi government steadfastly refused to provide any assistance to the debt ridden farmers. Are the farmer’s making ridiculous demands? Consider this – The entire amount of crop loans in India is worth Rs. 75,000 crore, while Mr. Adani’s firms alone owes Rs. 72,000 crores to the banking system. Adani gets a generous restructuring on the defaulted loans, while the farmers get tough love.

While the corporates are being given a free pass, Mr. Modi’s pets in RBI are baying for the blood of public sector banks. Recently, RBI’s deputy chairman Viral Aacharya suggested that the solution to the NPA crisis is re-privatisation of some of the public sector banks and some divestment of government’s stake in others, in favour of private players. RBI Chairman, Mr. Urjit Patel was not far behind, with suggestion that small banks afflicted with NPA problems should be allowed to perish naturally. The RBI satraps seem to be forgetting that it is the bulwark of public sector banks that protected India’s financial system from the crisis of 2008.

For Mr. Modi it is not enough, that Indian corporates have defrauded banks of the public money, they are now being offered the ownership of these banks.
Concession after concession given to corporates is what marks Mr. Modi’s 3 years at the helm and there is no indication of change in course away from this. Mr. Modi is making sure that those whose money purses have brought him power are going to stay safe and sound from the consequences of their own financial and business follies. Now that he has passed a law allowing corporates to make anonymous donations to political parties, grateful corporates will no doubt be flooding him with gratitude funds for his never ending election campaigns.

Courtesy: Newsclick

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THAT the large non-performing assets (NPAs) on the books of banks, especially public sector banks, is the only blemish in India’s continuing economic story, is the official view. Speaking recently at the Council on Foreign Relations in New York, Finance Minister Arun Jaitley reportedly declared that NPAs were “one very big challenge” facing the government, and resolving that problem was its “top priority”. Parallel to this, others such as top-level Reserve Bank of India officials, have been floating trial balloons, in the form of recommendations on various methods of addressing the NPAs. Not the least controversial among these suggestions is one, which calls for the sale of equity and assets by public sector banks, which will shrink their size and reduce government shareholding to well below 50 percent. NPAs are providing the final push for re-privatisation of banking. But opting for this may amount to throwing the baby out with the bathwater.

It cannot be denied that NPAs on the books of India’s banks have been rising rapidly in recent times, and provision for loss assets is affecting profitability extremely adversely. The ratio of gross non-performing assets to total advances rose from 5.1 percent at the end of March 2015 to 7.8 percent at the end of March 2016 and 9.1 percent at the end of September 2016. The figure is expected to exceed 10 percent by March 2018.

This sharp increase in GNPAs during the tenure of the current government is the result of two factors. First, the decision of the Reserve Bank of India to put to an end the practice of restructuring non-performing loans and treat the resulting ‘restructured’ assets as standard assets. And, second the unwillingness of the government to set aside adequate funds to write off the bad loans of the public sector banks, which were the principal locations for bad assets. GNPAs with the public sector banks stood at Rs 5.02 lakh crore at the end of March 2016, but the budgetary support for recapitalisation during 2015-16 and 2016-17 amounts to a tenth of that sum or Rs 50,000 crore.

This reticence to recapitalise adequately was a signal that the government would not relax its fiscal conservatism to release resources to restructure the public sector banks, leaving them finally to their own devices. This does not meet the criterion of fairness, since what was happening to the public sector banks was, in substantial measure, the result of other policies being adopted by the government. Two such policies need special mention. One was the decision to substantially relax a range of controls on foreign capital inflow into the economy, through moves first adopted in the early 1990s, that gained momentum subsequently. This resulted, during the post-2003 surge of cross-border capital flows worldwide, in a huge infusion of external liquidity into India that was nowhere near matched by foreign exchange outflows either for current expenditure or investments abroad. The increase in liquidity swelled deposits with the banks and forced a sharp increase in the credit advanced by the banking system. As the Reserve Bank of India (RBI) has itself recognised, the rapid build up of credit resulting from the expansion in deposits provided the ground for inadequately informed or risky lending decisions.

The second set of policies that underlie the bad debt problem was the decision to encourage private players into the infrastructural areas and incentivise investment by them, to make up for shortfalls in public investment as a result of the fiscal ‘crunch’. Simultaneously the government in the name of financial reform shut down the development banks with access to lower cost capital because of lending and guarantee support from the central banks and the government. Development banks were too dependent on the State and prevented the provision of a level playing field for the private sector, it was argued. So the promoters of many infrastructural projects, deprived of access to development banks, had to turn to the commercial banks for financing. Possibly mistaken that these projects had an unstated government guarantee of viability, the banks flush with funds came forward with the funding.

Unfortunately, many of these projects proved unviable, and soon were defaulting on their debt service commitments, contributing in substantial measure to the NPA problem. So the government’s policy of private sector based infrastructural development, combined with its decision to close development banks, led to increased bank exposure to risky infrastructural projects with long gestation lags.

The effect of all this has been a now forgotten feature of post-liberalisation banking in India. That effect was a post 2003 credit surge. That surge increased exposure to more risky sectors and borrowers and resulted in a reversal of the decline in the Gross NPA ratio ensured by a restructuring exercise that began in the mid 1990s. GNPAs had come down from 15.7 percent of gross advances in 1996-97 to 10.4 percent in 2001-02, 5.2 percent in 2004-05and 2.3 percent in 2008-09. It is in the period since then that the ratio has again risen back to an estimated 10 percent plus currently. In sum, the years of liberalisation and reform have been characterised by a decline, followed by a rapid build up in the NPA ratio. Hence addressing the phenomenon required the State to rethink the policies that led to the explosive NPA turn-around.

Those policies led to an unsustainable expansion in commercial bank credit to finance the private consumption and investment that drove the economy’s high growth. With the credit boom running up against large scale default, that growth is under question. The Reserve Bank of India’s Financial Stability Report released in December 2016 recognised this strain when it said that NPAs together with the danger that deteriorating macroeconomic conditions could worsen the problems faced by these banks, had made the banks “risk averse”, as they focused on “cleaning up their balance sheets”. Outstanding non-food credit from the SCBs, which rose in all other major areas such as agriculture, services and personal loans, fell in the industry sector over the year ending November 2016. Outstanding loans to industry which had risen from Rs 25,419 billion on November 28, 2014 to Rs 26,687 billion on November 27, 2015, fell to Rs 25,793 billion on November 25, 2016.

The decline in lending to industry was focused on the infrastructural sector, with power and telecommunications setting the trend. Outstanding loans to power, which had risen from Rs 5,311 billion in end November 2014 to Rs 5,865 billion at the end of November 2015, fell significantly to Rs 5,253 billion at the end of November 2016. The figures for telecommunications were Rs 863 billion, Rs 907 billion and Rs 849 billion respectively on those three dates.

If despite this, non-food credit growth was positive during 2015-16 (November to November), though reflecting considerable deceleration in growth relative to the previous year, it was largely because of a sharp increase in retail lending, mainly for housing investments and vehicle purchases. Even in financial year 2015-16, retail lending registered double digit growth with housing loans that accounted for 54 percent of the total, increasing by more than 16 percent. Outstanding housing loans also rose from Rs 5,946 billion on November 28, 2014 to Rs 7,052 billion on November 27, 2015, and to Rs 8,153 billion on November 25, 2016. The corresponding figures for vehicle loans were Rs 1,194 billion, Rs 1,379 billion and Rs 1,673 billion respectively.

Thus, clearly, banks are cutting down on their overall lending and restructuring their portfolios to reduce exposure to the infrastructure sector in favour of the retail sector. Both these trends have implications for growth in the immediate future. For a decade and a half now, Indian growth has been fuelled by credit financed investment and consumption spending. So a deceleration in credit expansion implies that the principal stimulus to growth is being dampened, with obvious implications.

So resolving the NPA issue is crucial to keep credit flowing and sustaining growth. Moreover, restructuring debt is also the means to preventing a deleveraging process that could convert a growth slowdown into a crisis. Yet, trapped in its obsession with the fiscal deficit and unwilling to raise additional revenues through taxation, the government is hoping that the banks that were called upon to take on the task of driving growth would address the resulting NPA problem themselves.

Policies have been aimed at supporting the restructuring efforts of the banks. One was to permit private Asset Reconstruction Corporations, which would buy up stressed or loss assets at a large discount, with part payment in cash and the rest in security receipts that would be settled when the loan assets had been restructured and sold. Despite the presence of 16 ARCs by 2016, the pace of acquisition of NPAs by these companies has been slow, because of the huge discounts they demand and their own limited absorption capacities. Faced with this impasse the government has at various points considered the option of setting up a State-backed ARC. But that would require outlays from the budget, with attendant implications for budgetary outlays and the fiscal deficit it is unwilling to accept.

To avoid this, the government seems to be making a final push for privatisation, so as to mobilise resources for this round of NPA write off. That would let off the defaulters, often wilful, who have taken large loans and misused them. But it would also shrink the public sector and place the private sector in charge of much of credit flow in the economy. The private banking sector will cherry pick its clients and finance high-return speculative ventures, depriving industry and infrastructure of financial support. Growth would suffer. Many would be excluded from financial access. And if global experience is evidence, NPAs would only return. But an obsession with fiscal conservatism promoted by finance is pushing the government to adopt this drastic and counterproductive turn in policy.
 

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What is a  Bad Bank?

A bad bank is basically a bank which will buy the bad loans from different banks and try to “reconstruct” the assets to get back the money that was due.

With the main opponent to this plan- Raghuram Rajan out of office- the finance minister of India, the chief economic advisor to the Indian government  and a deputy governor of the Reserve Bank of India have recently opined that a bad bank should be established as soon as possible.
 

1. Why did Raghuram Rajan oppose it?

He opposed it because of the Indian banks’ debt profile. Almost all the bad loans or NPAs are in government owned public sector banks and almost all of these are a result of loans being given to privately owned corporation and business houses. The private sector will not invest in a bad bank because it is a venture which guarantees loss. So, Raghuram Rajan was worried about the government using public money in order to settle private debts which might have serious consequences for India’s debt to GDP ratio.

In other words, Raghuram Rajan implied that if most of the loans were in the private sector banks then the banks would/could have been forced to raise money from the public through securities to solve that problem. But now the government will be forced to do that if it decides to set up a bad bank which will increase government debt and force them to limit expenditure.
 

2. What does it mean in simple words?

Well, we as a nation have watched in slow-motion all the bad business decisions of liquor baron Vijay Mallya, such as, buying an IPL team, buying a Formula 1 racing team, private jets, expensive cars and last but not least swimsuit calendars. If a “bad bank” is formed all of Vijay Mallya’s bad loans could be transferred to it and the government will have to use our money to right Vijay Mallya’s mistakes. I don’t know about you but I find this completely unacceptable. But, Vijay Mallya is just one example- there are hundreds of people like him, many of whom are even bigger spenders than Mallya.
 

3. If this plan is so bad then who is supporting it?

Last year the former RBI governor Rajan forced all banks to disclose their Non-performing assets. This led to a lot of embarrassment for many bank officials when it emerged that they gave loans to private business concerns which should not have got any if normal banking procedures were followed. Investigative journalists also soon found out that many of these loans were given out due to pressure being exerted by government bureaucrats on the banks.

But now with a bad bank buying up all the banks’ bad loans and NPAs- the bank officials and bureaucrats can wash their hands off of their misdemeanours and pass the responsibility for an asset’s “non-performance” onto this newly founded institution.
Bankers have a second reason to support this plan. If a bad bank is set up then the responsibility of banks to lend money responsibly considerably decreases because after all if the loan becomes a Non-Performing Asset then they can simply sell it to the Bad Bank and wash their hands off from any fallout.
 

4. Is there any alternative to deal with NPAs other than opening a Bad Bank?

In order to deal with bad loans the government owned banks have been engaging in “assets reconstruction” either by themselves or by employing privately owned Assets Reconstruction Companies, but this initiative has been a failure. Now with a bad bank the government is hoping to succeed by setting up a big government owned Assets Reconstruction Company to deal with NPAs. I have only one thing to say here, that is to quote Albert Einstein- Insanity is doing the same thing again and again and expecting different outcomes.

Indian government should seriously and sincerely think of a different way to deal with these Non-performing assets. Below I have mentioned a suggestion- please have a look at it.

Possible Solution

One of the meanings of the word “democratise” is to make something available to all. Why don’t we democratise the NPAs?

Keep the NPAs with the respective banks. The banks know who their high value customers are. Banks can contact the assets reconstruction companies and not ask them to reconstruct the non-performing assets which take a lot of time without any guarantee of success but asks them which failed assets can most easily be reconstructed or re-converted into a profitable asset. This is not a difficult job to do and frankly there are many private consultancy firms in India which can do this job. The banks then should offer to sell these NPAs which have high probability of success to their high value customers. Only those customers who have impeccable credit record which can be easily determined with the help of CIBIL or Credit Information Bureau of India Limited should be made eligible to buy such an asset.

Any asset thusly sold to a private party should for a particular time period be made eligible for loans based only on the immovable assets of the business or the high value customer to whom this NPA had been solved. Moreover, loans should only be approved if the buyer of these assets agrees to implement the changes which have been proposed in a plan drawn up by the bank and the firm which assessed the non-performing asset before it is sold to the high value customer.

There are many high value individuals banking with Indian banks but most do not have any business background or entrepreneurial acumen. The pre-conditions to sell NPAs to such individuals should also be that they agree to set up an independent board of directors who can run the everyday operations of the newly acquired asset. The size of this board must vary according to the size of the asset and always be an odd number to avoid indecision.

I think this plan will work because there are many NPAs which have a lot of potential but have been run down by bad business decisions. I also think that there are sufficient number of high value individuals using the Indian banking system who would love to own a business but are hesitant to do it because they do not want to start from scratch and because they are ill-equipped to run the day to day operations of such a business. Moreover, a high value individual will most likely “adopt” a business close to where he/she resides, this will help in the welfare of local communities since NPAs and high value bank customers can be found everywhere in India.

If you like this suggestion on an alternate method to deal with NPAs, please share it online and on government portals.

(Full disclosure– There was recently a similar move to create a bad bank for Europe, but it has been shot down by EU’s biggest economy- Germany. I have been trained by and worked closely with at least 3 leading German economists and economic historians so the above article might be a result of my pre-conceived ideas.)
 

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