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BRP Bhaskar: Troubled banking system
February 16, 2016
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Exclusive to The Gulf Today

How healthy is India’s banking system, especially its large public sector component? The question has assumed significance following reports that state-owned banks wrote off bad debts to the tune of Rs 2,110 billion between 2004 and 2015.

Based on material provided by the Reserve Bank of India, the country’s central bank, in response to a Right to Information query, the Indian Express said the banks had written off as much as Rs 1,141.82 billion in the last three years alone. Bad debts which stood at Rs 155.51 billion in March 2012 had shot up to 525.42 billion by last March, it added.

Public sector units dominate India’s banking sector. The British-owned Imperial Bank of India, which the government took over in 1955 and renamed State Bank of India, is the country’s largest commercial bank. It now has more than 16,000 branches, including 191 abroad. Its assets stood at Rs 20,480.80 billion a year ago. Banks set up by former princely states function as its associates.

Fourteen large private banks were nationalised in 1969 and six more in 1980.

The SBI topped the list with write-offs of Rs 400.84 billion in the last three years. The Punjab National Bank, the second largest bank, stood next with a write-off of Rs 95.31 billion.

Responding to media reports, the Finance Ministry, the RBI and the SBI said loan write-off was basically a technical exercise to cleanse the balance sheet and achieve taxation efficiency. It was done at the head office level and did not preclude the branches from continuing recovery efforts.

However, many financial analysts voiced concern over the rise in bad debts and the recent fall in bank share prices. RBI Governor Raghuram Rajan accused critics of making claims bordering on scare-mongering. He attributed the fall in share prices to the turmoil in the world markets but conceded that the performance of some banks, particularly public sector units, was not pretty.

There may be no need for panic, as Raghuram Rajan says, but there is certainly cause for worry. The RBI recently put the value of banks’ stressed assets (including restructured loans) at Rs 7,400 billion. This means 10.9 per cent of all loans is stressed. Standard and Poor’s has forecast an 11-to-12 per cent growth in stressed assets during the year.

The issue of bad debts was a well-kept secret until the All India Bank Employees Association released a list of top defaulters in 2014. It contained names of 406 account holders who owed the banks Rs 703 billion.

Liquor king Vijay Mallya’s Kingfisher Airlines headed the list with debts of Rs 26.73 billion. The Winsome Diamond and Jewellery Company was a close second with debts of Rs 26.60 billion.

Among the other big defaulters was a construction company owned by KS Rao, who was Textile Minister in the Manmohan Singh government at that time. Raghavendra Rao and Deepak Puri, two businessmen whom the government had honoured with Padma awards, also figured in the list.

The AIBEA said bad debts of public sector banks had risen from Rs 390 billion in 2008 to 2,360 billion in 2013.

It alleged that banks, including private and foreign ones, had written off loans totalling Rs 2,040 billion between 2001 and 2013 under political pressure. It asked the RBI to publish the names of defaulters and demanded enactment of legislation to improve the recovery process and to make wilful default a criminal offence.

Raghuram Rajan, professor of finance at the University of Chicago and a former chief economist at the International Monetary Fund, took several steps to help the banks deal firmly with defaulters immediately after he took over as RBI governor in 2013. Guidelines issued by the RBI allowed banks to convert debt into equity and take control of defaulting companies if debt restructuring failed. The banks could then find new promoters to run the companies.

The Modi government, which assumed office the following year, announced a seven-point programme to revive public sector banks. It has only been implemented partially.

The latest debt figures indicate that the steps taken by the RBI and the government have not yielded anticipated results. The government told Parliament last year that 30 top defaulters owed public sector banks Rs 951.22 billion. This was more than one-third of their non-performing assets.

The name-and-shame policy adopted by some banks also does not seem to have had any effect on the defaulters.

The RBI and the government must urgently come up with foolproof measures to ensure the good health of the banks with a view to safeguarding the interests of the depositors and honest borrowers.

the author

is a political analyst of reckoning.

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