NPAs: is the axe going to fall on the common man?

Under the erstwhile UPA dispensation, particularly during its second term, 2009-2014, public sector banks [PSBs] gave loans recklessly to corporate houses without assessing the viability of projects and conducting due diligence. Tens of thousands of crores were pumped into power, steel, telecommunications, textiles and infrastructure.

In many cases, the ability of the projects or businesses to generate cash to service the loans was in doubt from day one. There was an element of ‘inevitability’ in such loans becoming non-performing assets (NPA). Indeed, these did become NPAs but were not recognised in the balance sheet as such.

In 2015, the Reserve Bank of India, under its former governor Raghuram Rajan, ordered an asset quality review (AQR) of all banks to identify stressed assets and make necessary provision in the balance sheet. We now know banks are saddled with NPAs of about Rs 8 lakh crore, of which PSBs alone account for about Rs 6 lakh crore. The total stressed assets, including ‘restructured’ loans -- NPAs made to look like standard assets by relaxing repayment terms -- are much higher at over Rs 10 lakh crore.

Following the review, the ‘cleansing’ process was to be completed by March 2017, but it did not happen. But the Modi government has responded well by enacting the Insolvency and Bankruptcy Code (IBC) and amending the Banking Regulation Act.

While the IBC gives powers to banks to initiate bankruptcy proceedings against defaulters, the amended Banking Regulation Act empowers RBI to give necessary instructions to banks in this regard. Already, 12 cases accounting for about Rs 2 lakh crore worth NPAs have been referred to the National Company Law Tribunal (NCLT). More accounts are on the way.

The IBC proceedings are to be completed within six months. But the more important question is, what will be the outcome? Considering the track record of borrowers, it is unlikely that banks will recover a good slice of the loan amount (say two-thirds to three-fourths) via settlement. In a majority of the cases, the NCLT will order liquidation of the company, in which case there is no certainty as to how much will be realised, and by when.

Meanwhile, the banks face a huge erosion in their capital base due to provisioning on a monumental scale -- in the 12 cases referred to above, on mere reference to NCLT, 50% had to be provided for; if liquidation is ordered, this will be 100%. They need to be recapitalised on top priority or else lending, which during 2016-17 was already at its lowest in six decades, will take a further steep dip.

Recapitalisation not easy

According to Fitch Ratings, PSBs would require around 90% of the $65 billion additional capital needed by banks in India to meet Basel III capital standards, which will be fully implemented by the financial year ending March 2019. This works out to Rs 3.8 lakh crore and is necessary to raise loan growth, address weak provision cover and aid in effective NPA resolution. 

Against this, the government is working on an estimated capital requirement of only Rs 1.8 lakh crore. Of this, under project ‘Indradhanush’, it has provided Rs 70,000 crore over a four-year period -- Rs 25,000 crore each during 2015-16, 2016-17 and Rs 10,000 crore each during 2017-18, 2018-19 -- as budgetary support. The banks are expected to raise the balance Rs 1.1 lakh crore from the market. But even this appears to be difficult.

Funding it from additional budgetary support will result in significant slippage from the fiscal deficit target of 3.2% of GDP for the current year and 3% for 2018-19. Just in case the government has to provide for a further Rs 2 lakh crore – the gap between the required Rs 3.8 lakh crore as per Fitch Ratings and the Rs 1.8 lakh crore estimated by the government -- the impact on the fiscal roadmap will be disastrous.

Caught in a tight spot, the Modi government is now contemplating sale of so called ‘capitalisation bonds’. The bonds will be issued by the Union government and will most likely be subscribed to by state-run financial institutions such as LIC. The interest on these bonds would be adjusted against future dividend payments by banks.

On the surface, this looks like a win-win for PSBs and the Union government. While the former get the money they need for recapitalisation, the latter is able to supply it without causing any slippage in the fiscal deficit target. But, this is disingenuous.

Whether it is money coming from the budget (Rs 70,000 crore) or from financial institutions like LIC (Rs 1.1 lakh crore), the government is using up resources collected from the common man as taxes or as insurance premium from millions of LIC policyholders to bail out the banks. It is tantamount to bailing out the industrial houses who took huge loans using their proximity to politicians and bureaucrats, but did not return to repay.

Modi should avoid this course. Instead, the government needs to go after the defaulters and get the money back in fast-track mode. If today their assets are falling short of the loans they have taken, they must have diverted funds from project to their personal accounts using shell companies. For instance, Vijay Mallya is alleged to have diverted Rs 6,000 crore bank loans taken for Kingfisher. The agencies must chase them and recover as much as possible.

This is an absolute must or else in the eyes of public. Otherwise, the present government will be no different from the UPA regime. The people will conclude that whether it is the UPA or the NDA, it is the common man who is made to pay for the shenanigans of the rich and the politically connected.

(The writer is a policy analyst)