Corrective measures needed within banking sector

The Non-Performing Assets (NPAs) of the Indian banking sector are about 11.5% of net value, at present. The NPAs are unpaid bank loans by the concerned borrowers; consequently, borrowers accrue huge debts.

This is an aftermath of unwise decisions by several public and private sector banks regarding approval of loans, slippages to the actuation of timely loan retrievals, failure of complete curtailment of new loan exposures, and the attendant, steep dwindling of capital balance and loan providing capacity.

Numerically, gross NPAs have increased to nearly Rs 10.3 lakh crore compared to Rs 8 lakh crore about a year ago. During the preceded financial year, the banking industry registered a net loss of about Rs 40,000 crore on account of proliferating NPAs.

To rectify the acute dilemma and to curtail its further degeneration, the Reserve bank of India (RBI) has started review of more than 200 stressed assets, adversely affecting the banking sector. Several of leading business groups are included within the ambit of this work. Their bankruptcy proceedings could commence from the juncture of receiving necessary response documents from the concerned banks by the RBI authorities.

This is an aftermath of some recklessness within the economy. It has been entailed by expenditures greatly eclipsing earnings, and liabilities far outstripping assets in certain sectors of the economy. The consequence played out as a slump in credit demand from crucial sector such as retails and infrastructure, along with the compelling rise of risk aversion in lending by the banks.

A crucial remedial step to overcome this financial quandary was provided by the central government. It announced its decision to infuse Rs 2.11 lakh crore to several public sector banks during the last week of September, 2017.

The stated capital infusion is scheduled to spread across the time span of two financial years: 2017-18 and 2018-19. In January, 2018, the government went ahead with the first installment of recapitalisation of the adversely affected public sector banks (PSBs): it bolstered the banking system with a fresh insertion of Rs 88,139 crore.

Out of the said total financial amount, Rs 80,000 crore was given as recapitalisation bonds; the remaining sum of Rs 8,130 crore was raised in market by banks.

An attendant, necessary rider also came by. Strict reforms measure for greater accountability and transparency was included in the financial relief package. The funds would be contingent upon the effective performance of banks. The crowning feature of the requisite reforms was the acceptance and adaptation of the Enhanced Access and Service Excellence (EASE) by the PSBs.

The EASE comprises six attributes: customer responsiveness, responsible banking, credit off take, functioning of PSBs within a rectification and performance programme named “Udayani Mitra”, spread of financial inclusion, and digitisation and development of personnel for the successful public relations of PSBs.

There have been allegations of political pressure regarding the awarding of non-retrievable loans and its continuous increase despite discernible warning signals. Also, talks about sharp, questionable mutual benefits from lending to some corporate groups, despite obvious risks, have come to the fore.

There have been instances of RBI officials admitting informally, that a certain amount of political pressure did contribute toward decisions of the lending of humongous loan amounts by several PSBs. However, the encouraging aspect amid this distressing scenario is that the central government and the RBI appear to have begun on a strict, no-compromise approach regarding the necessary correctives of the banking sector.

Union Minister Arun Jaitley stated that the reforms would see to it that bank capital infusion leads to the practice of highest standards in bank governance. Financial Services Secretary Rajiv Kumar dwelled about non-interference by the government in the commercial decisions of the PSBs. He also said that efforts would be made to strengthen and empower the boards of the sundry banks in question.

On its part, the RBI has taken to an important asset quality review. This endeavour is the second such after the first review was started by the then Governor Raghuram Rajan. Of the business entities concerned, 12 had been identified as seminal regarding loan defaulting.

A list of those 12 entities was sent by the RBI for resolution under the Insolvency and Bankruptcy Code (IBC). Out of this, 11 are at various stages of nearly reaching a resolution across various benches of the National Company Law Tribunal (NCLT). The concerned banks are expecting to recover more than 50% of net loss from the accounts of these business entities.

Commodity cycle

Notwithstanding assurances of prevention of such a state of affairs in future, an earnest observation to what led to its fruition is merited. The germination of this financial ordeal took place during the Financial Years 2006-07 to 2011-12.

Notable entities of the corporate sector had borrowed excessively from sundry banks. It was more of a debt-propelled economic expansion than otherwise. Investments in huge projects in power, metals, and infrastructure took place.

Some overseas acquisitions were also made. Nevertheless, by Financial Year 2012-13, a meltdown in the global commodity cycle was discernible and palpable.

When that came by, many investors found to their discomfort that they had embarked upon too much financial risk without provisioning necessary fall-back resources. The requisite financial liquidity to service accumulated debts was not enough. Debt traps hung heavily atop them.

It seemed that engendering of revenues and savings or at least avenues for doing so had not been given an earnest cerebration by the concerned investors. Furthermore, the banks had given too much industrial loans, ability for further meaningful assistance was greatly constricted, if at all any. Those concerned were faced with an abstruse situation.

To prevent such recurrences in future, the banks would have to abide by the wise and thoughtful norms spelt out by the central government and the RBI.

Appropriate management to recognise early premonitions of possible defaults along with tighter accounting procedures on NPAs identification are a pressing imperative. There are ordeals ahead. Even then, however, they are not insurmountable.