banks would have the ability to absorb only 7 per cent of the shock
When Uday Kotak, executive vice chairman and managing director of Kotak Mahindra Bank, talks about the weak underbelly of the banking system, it is time to sit up and take notice. It is also time to understand that the rot in banking can no longer stay hidden.
“The weak underbelly of Indian banking, which I have been consistently pointing out through the years, has resurfaced strongly,” Kotak wrote to his shareholders recently. “Both public and some private sector banks have revealed stress on their balance sheets. The story is not over yet, and we can expect to see more bad news on this front.” He said the banks had been “postponing the pain” for the past several years, and that it has had a ballooning effect on exposures to bad risks.
A massive cleanup drive is now under way to fix the system. Most banks are taking a conservative approach to business to build up adequate reserves to compensate for possible losses from nonperforming assets (NPAs). “We have complied with whatever was required from us by the RBI,” said Bharat Dangar, member of the board of directors of Bank of Baroda. “Right now, we are going a bit slow with all lendings, be it for consumer purchases or corporate loans. The idea is to first create adequate provisions.”
Bank of Baroda has gross NPAs (likely bad loans) of about Rs 40,521 crore; it has written off Rs 19,521 crore as net NPAs (confirmed bad loans). “It [building up provisions to make up for future losses] is an exercise that will take a few months,” he said.
Big borrowers account for most bad loans of Bank of Baroda. Such loans are now affecting the disbursal of loans for durables, housing and education. “Loans to medium and small businesses have petered out since the RBI directed banks to take stock of their NPAs. Even branches with whom we had done business for years are refusing loans,” said Anil Kumar Aggarwal, managing director of Noida-based PME Power Solutions and senior vice president of Federation of Indian Micro & Small and Medium Enterprises. “We are out with a begging bowl for funds to buy raw materials and meet our commitments. Sometimes we approach two to three banks for separate, smaller loans. Many people also opt for unsecured loans on higher interest.”
NPAs of banks amounted to Rs 13 lakh crore as of March this year. Almost 11 per cent of total borrowings registered by the Indian banking system are already bad loans. A recent International Monetary Fund report said 37 per cent of debts in India were at risk. In the event of zero recovery of all these loans, said the report, Indian banks would have the ability to absorb only 7 per cent of the shock.
On August 1, the Lok Sabha passed a key bill that paves the way for easier and faster recovery of bad loans. The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, simplifies the procedure to dispose of bad loans by empowering banks to take possession of collateral (except for farmland) and by providing for speedy resolution of pending cases before debt recovery tribunals. The bill also envisages the setting up of a central registry to record details of all secured assets.
A total overhaul of the banking system is now in the cards. “There is hardly any attention given to conducting due diligence of big borrowers by banks,” said Pawan Vijay, corporate banker and director of IFCI, an industrial funding agency. “Instead, they look at numbers like profit and equity ratios, which hold no significance in today’s age of innovative business practices. Banks must change the way they do business or risk losing value, not just for themselves but [for] the economy as well. Lending is not business for banks; development of the economy is.”
The government has set up the Banks Board Bureau, with former comptroller and auditor general Vinod Rai as chairman, to draw a roadmap for the banks. “We expect the bureau to frame broad guidelines for banking reforms in the coming month or so,” said Shaktikanta Das, economic affairs secretary. “After that, the working details would be notified [to banks] from time to time.”
A concern for banks is the low level of capital available with them. A recent RBI review showed that all banks, both private and public, had witnessed a steady decline in the ratio of their capital reserves to risky assets held in the past one year. “If reserves with the banks fall below a certain level, or the minimum floor as set by RBI, then banks can face some severe consequences,” said Das.
Consolidation in public sector banks is likely to dent the government pocket. Already State Bank of India has received regulatory and government permission to acquire seven State Banks.
While 08,000 crore was allotted in the Union budget for infusing fresh capital into loss-making public banks, many believe that Finance Minister Arun Jaitley would have to allot another Rs 3,000 crore to settle claims of employees, create IT infrastructure and remove disparity in pay structure among the group banks.
“Consolidation is not the only answer to resolve this crisis. Much more has to be done at the level where banks are able to think innovatively in their business and adopt modern technology like analytics,” said Alok Prasad, CEO of Microfinance Institutions Network.
Interestingly, the microfinance sector, the smaller cousin of the banking system, has fared better with regard to NPAs and reported better recoveries of bad loans. The sector gives the credit for that to paying attention to individual needs, the business bonding between lenders and borrowers and having a healthy credit ecosystem. “The lesson we learnt is that we must support our borrowers to ensure that they are able to meet their payment commitments,” said Prasad. Perhaps, it is time for the banks, too, to take note of such innovative and easy solutions to solve their, and the economy’s, gargantuan problem.