Resolve NPA crisis with bank mergers

Banks which cannot survive without the government's capital infusion must be abs-orbed by larger banks.

In 2013, then finance minister P Chidambaram, speaking about Non Performing Assets (NPA) in Public Sector Banks (PSBs), sounded a warning on the banker-businessman nexus by asserting that “there cannot be affluent promoters and sick company.”

Three years later, the Reserve Bank of India (RBI) Governor Raghuram Rajan has echoed a similar sentiment – “If you flaunt your yacht, massive birthday bashes etc, even while owing the system a lot of money... it seems to suggest that you don’t care. I think that is the wrong message to send out. If you are in trouble, you should show that you care by cutting down your expenses”.

Unfortunately, for taxpayers who are majority shareholders in PSBs, the government seems in no mood to punish wrongdoers while the regulator is according a kid-glove treatment to affluent promoters.

Riding on the 2014 election promise of “Minimum Government, Maximum Governance,” shares of many PSBs hit record highs. Market participants read the slogan as a prelude to privatisation of public sector organisations including banks.

Following inaction of the government over the last 2 years on privatisation and governance reforms along with lack of enforcement by regulators, PSBs shares hit record lows causing a market cap erosion of close to Rs 1 lakh crore. The Nifty PSU Bank index which was hovering around 4,100 last year this time is currently at 2,200, indicating a loss of almost 50%. Many banks which were valued at 1.5 times book value not long ago are now trading at about 0.4 times.

Between the 2013 exhortation of the finance minister and the 2016 remark of the RBI Governor, there has been a multifold increase in stressed assets. Current NPA estimates range anywhere between Rs 7 lakh crore and Rs 10 lakh crore.

Although unsure of the magnitude of bad loan problem in PSBs, Finance Ministry officials and the RBI think they are manageable by tweaking Strategic Debt Reconstruction norms and revaluing real estate assets. Regrettably, the current path to resolving the humongous NPA problem in PSBs is inadequate and lacking in courage, conviction and imagination. It fails to follow the international principles of corporate governance.

Bad loan problem in banks arises for many reasons like lax credit appraisals, default of loans due to economic cycle, an adverse interest rate environment etc. But in our country, many of the NPAs can be attributed to an entrenched corrupt banker-businessman nexus. Moreover, promoters have borrowed from several banks by offering the same collateral. Data analysis on big loans to 3 companies by PSBs is sufficient to indicate the depth of the rut in the system.

Bhushan Steel owes more than Rs 40,000 crore to some of the largest PSBs, including the likes of State Bank of India and Punjab National Bank. Last August, its MD Neeraj Singhal was arrested by the CBI in an alleged cash-for-loan scam involving Syndicate Bank CMD
S K Jain. Despite his detention, the company was allowed to restructure its loan with the same promoter at the helm. Deccan Chronicle Holdings, too, had borrowed heavily by offering the same assets as collateral.

Banks became enlightened of this fact only after the company defaulted on its loans. Many banks led by Canara Bank, Andhra Bank and some private sector banks claimed the first charge over the same set of assets. The case of Kingfisher is well known; the company owes more than Rs 9,000 crore to several PSBs, which are having a harrowing time cashing in on some of the collateral provided by the company.

Threefold solution

A universally adopted solution to such a tectonic loan crisis in banking system is threefold – zombie banks will fold and others with reasonable asset base will be absorbed by bigger ban-ks. And public prosecutors will follow the money trial to prosecute corrupt bankers and promoters who are willful defaulters to send a strong message of zero tolerance on corruption.

Unfortunately for the taxpayers, despite non-performance and lack of accountability in PSBs, the government continues to infuse capital even in zombie banks. Last year, the government received preferential equity in exchange for Rs 13,000 crore of taxpayer money in 8 PSBs. Today, those shares have lost more than 50% in value costing the taxpayers dearly.

Rather than delaying the inevitable, the government and the regulator should follow international norms to avoid a crisis. Banks like Syndicate Bank, which reported a loss of Rs 120 crore in the last quarter, United Bank of India which lost Rs 490 crore and Indian Overseas Bank which was in the red for Rs 550 crore, cannot survive without capital infusion from the government and, hence, should be absorbed by larger banks.

Zombie banks like Bank of Maharashtra, UCO Bank, Central Bank of India, Vijaya Bank and Dena Bank, who have perennially deferred recognising NPAs in order to report a profit, should be shut or sold to the highest bidder.

The NPA in PSBs is by far the biggest challenge and a true governance test for the Narendra Modi government. Way back in 1998, the Narasimhan Committee proposed far reaching reforms but the employee unions of the RBI and PSBs scuttled its implementation. This time ar-ound, it must choose taxpayers over employee unions and send a strong signal to global and Indian investors that it is serious about transforming the country.

(The writer is a Bengaluru-based money manager)

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