Stressed Assets: A consumer's perspective

Ridiculing public sector banks cannot be a solution. Rather, authorities need to undertake in-depth and granular research of causal factors

The rise in stressed assets (SAs) in banking sector can stress financial markets and citizens alike, and therefore, the Reserve Bank of India (RBI), the Central Government and commercial banks are trying to address the situation with utmost attention. Stressed assets are mainly high in public sector banks (PSBs), which are generally vulnerable to political pressures and have a social responsibility to lend to certain segments of economy.

Accordingly, PSBs have SAs in the range of 17% when compared with 6% in foreign banks and 7% in private banks. However, higher SAs, though recorded in many sectors, are mainly concentrated in infrastructure, iron and steel, textiles, aviation and mining. Interestingly, high SAs are recorded in medium size (31% of total) and large industry (23%). In contrast, ratios of SAs in priority sectors and agriculture are low.

In general, cause of rising SAs could be many and some certainly could be exogenous, like sudden slow-down in economy — domestic and global, spill-over from aggressive policies pursued by other countries, policy paralysis of the past, laws relating to land acquisition, and mining related issues. 

Further, difference in approach of PSBs and private sector banks followed in extending and monitoring loans could result in different volumes of SAs, as was demonstrated in the case of tractor loans. Similarly, other factors like inaccurate assumptions regarding growth and market behaviour, while preparing and evaluating the project report and even mal-intentions in extending and availing loans could be responsible. 

In India, it has been empirically demonstrated that banking is resilient despite being misused because of robust banking regulation and supervision by the RBI.

The tradition of loan melas that was  prevalent in the 1970s and 1980s, is still fresh in the memory of many borrowers — rural and urban or small and big industrialists. Loans from PSBs, due to government ownership, are generally considered as grants by many in agriculture and industry, alike. 

Given the long list of pending cases in courts due to well-known delays in judicial system does not help either in encouraging PSBs to initiate legal action nor deter borrowers from misconduct. Despite this, it needs to be recognised that PSBs after recording SAs of nearly 20% in mid 1990s, successfully staged a recovery to nearly 2% by 2009. Similarly, private sector banks, just about five years back, had higher SAs than that of PSBs. 

However, ridiculing PSBs and their top management cannot be a solution as that can lead to erosion of faith in general banking itself, painstakingly built over decades, and be counter-productive. Rather, the authorities need to undertake in-depth and granular research of causal factors so that such critical situations do not emerge again.

It also needs to be recognised that PSBs have played an important role since their nationalisation in 1955, 1969 and 1980. They were nationalised to pursue a social agenda of the government which they have been relentlessly pursuing. 

Illustratively, presence of PSBs in rural and remote areas is far higher than private and foreign banks. The success of Prime Minister’s Jan Dhan Yojana was also mainly on account of PSBs. Also, PSBs provide large-ticket loans and on long term basis and yield low returns. Further, as all PSBs have not recorded dismal performance, there are lessons to be learnt from within the sector itself.

Therefore, while critically evaluating SAs, it may be more appropriate to consider research-based, scientifically designed benchmarks for comparison, after netting off sectors which are stressed, and where private and foreign banks do not venture. Thus, the need is to undertake extensive research on why SAs are rising in only select PSBs.

PSBs are saddled with responsibilities of social agenda and priority sector lending which they have been faithfully performing. Earlier, to cover the costs of services associated with dispensing social responsibilities, government business was exclusively routed through PSBs but that practice has been discontinued. Therefore, when government seeks a social objective to be fulfilled by PSBs, probably, commercial costing of the service should be undertaken and banks which perform those activities, appropriately compensated.

Finally, while the deposits in banks of the public are insured, the government has been making extensive efforts to recapitalise the banks, and bank bureau announced in the Union Budget is already operational. To ensure that such critical situations don’t emerge again, there is also need to examine the role of auditors, rating agencies, and legal practitioners who provide supportive evidence in extending and monitoring loans. There may also be a need to have a permanent investigative committee of regulators, vigilance officers and forensic experts, to have a microscopic view of nexus between banking and business.

(The author is RBI chair professor of economics, IIM Bangalore)