Rajan is right, banks must act

The results of the public sector banks (PSBs) for October-December 2016, quarter have not come as a surprise to the stock market which had expected such a scenario anyway after the Reserve Bank of India had forced them to report the “true and fair” picture of their health. Even as it was prepared for the shocking drop in their net profits or some slipping into the red, the market is not yet convinced how many more skeletons are there in the cupboards of the PSBs in the form of bad loans. Brooking no nonsense, RBI Governor Raghuram Rajan is standing firm in the “clean-up” operation giving PSBs time up to March 2017 to fix the problems which have assumed humongous proportions. While different estimates are going around about bad loans, which are again sub-grouped into Gross Non-Performing Assets, Non-Performing Assets, Restructured Assets and Written Off loans, the size of the stressed assets as shared by Minister of State for Finance Jayant Sinha is Rs 8 lakh crore. That is almost half the size of the Union Budget.

 True, not all this money is gone, but the amount of loans written off by the PSBs in the last three years is stated to be Rs 1.20 lakh crore while the sum total under this head is Rs 2.78 lakh crore. According to the RBI data, 17 per cent of the PSBs’ total advances are under stress which include written off amount equivalent to three per cent. Whatever the government and the RBI may claim, the written off loans are as good as gone because in such cases, banks get their books cleaned up and there is not much incentives left to chase the defaulters and the assets sunk in lost businesses or misused by unscrupulous borrowers.

 Even with regard to bad loans, other than the written off amount, the size is so huge that it gets scary. The only consolation is that Governor Rajan is hell bent, insisting on the government-owned banks to fully provide, by way of adequate provisioning, for the stressed assets so that their survival is ensured and business uninterrupted. No matter how worse the financial results can go, as reported by almost all of them including the big ones like State Bank of India, Punjab National Bank and Bank of Baroda, and how much more valuation is lost on the market, the RBI must be supported for undertaking this “surgery” since “band aids” would not work and at best they would hide further the problems created by the reckless lending , helped by political masters and mismanaged by the project promoters who were either incompetent or dishonest. It is time for asset recovery by channelising the entire legal recourse and punishing the promoters who thought they could just about borrow and blow up the public money with impunity.

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