Explain the bad debt mess: Govt pulls up bankers for NPA woes

The bad debt woes of public sector banks (PSBs) are not limited to gloomy numbers on books now. PSBs have started facing the music as the government is summoning them to explain why the mess occurred in the first place.

The jury is out on who is responsible for the current non-performing asset (NPA) pile up, which stood at over Rs 6 lakh crore by the end of December 2016. Further, estimates suggest that the total stressed assets, put in various baskets of technicalities, is at least 12.5 per cent of the total loans, or about Rs 9.5 lakh crore of the total loans in the system. This figure, however, does not include ever-greening, or even those accounts that have been kept under artificial life support through various schemes of the Reserve Bank of India (RBI), which allows banks to rejig a loan but without reflecting it in the restructure book as the account becomes standard. A loose term used by the banking industry in such a case is ‘restructured standard’, which means stressed companies have been restructured and the interest on such loans are coming just before the end of the 91-day window, after which an account becomes NPA.

According to a Credit Suisse estimate, the gross bad debt of Indian banks is 9.5 per cent.

"In addition to the 9.5 per cent gross NPAs, Indian banks have 4-8 per cent of loans parked in various stress classifications (restructured/SDR but standard) and as most of these forbearances expire over the next 12-18 months, it will keep corporate NPA addition elevated," Credit Suisse said.

The aggregate numbers, thanks to the myriad of schemes, might never come out. Even after a 'deep surgery' like the asset quality review (AQR) of banks, which was supposed to uncover all the dirt under the carpet, Indian banks have continued to pile up more bad debt. What it shows is that Indian banks have mastered the art of what former RBI governor Raghuram Rajan described as the use of tools to not resolve a problem, “but also perversely, to avoid it".

Even after AQR and other measures, Indian banks appear to continue throwing good money after bad.

Credit Suisse said in the report that 37 per cent of the loans were given in the past 12 quarters, or three years, to companies that had interest coverage (IC) ratio of less than one. This clearly takes away the alibi of bankers that loans are not performing due to the economy. The economic slowdown had started much before 2013 but banks continued to pour money into sick firms.

The ratio being less than one indicates that the companies are not even fit enough to service their interest cost. In a one-year period, these firms, with IC of less than one, saw their earnings before tax and other deductions fall by 10 per cent.

What is surprising is that 67 per cent of the loans given to the power sector are to those companies with an IC of less than one. For the telecom sector, 45 per cent of loans have gone to companies with an IC of less than one.

As loans age, their credit cost also increases and the companies’ interest coverage ratio worsens further.

The government, recently, arrested senior bankers, including former chairman of IDBI Bank. On Monday, 10 chiefs of PSBs met the finance minister to stop this witch-hunt.

Still, the bankers have not been able to answer clearly why this huge spike in bad debt occurred. Further, blaming the economy no longer seems like a tenable option.

Therefore, when the Public Accounts Committee (PAC) of Parliament grills the CEOs of Indian Overseas Bank and Indian Bank on February 27 about why their gross bad debt has surged way above 20 per cent, the bankers will find it difficult to answer.

RBI, in 2013, had restricted Kolkata-based United Bank of India from extending loans after the bank reported a huge surge in bad debts and drop in capital.

The same can be possible for the Chennai-based Indian Overseas Bank and Indian Bank.