<b>A V Rajwade:</b> The nagging bad debt problem

It's not just crony capitalism and dishonest businessmen who are responsible for NPAs in PSBs

Last Friday, Finance Minister Arun Jaitley and senior officials in his ministry had a conference with the governor of the Reserve Bank of India (RBI) and its senior executives to discuss how best to tackle the problem of bad debts or non-performing assets (NPA), and the possible formation of a “bad bank” to mitigate it. The idea of a “bad bank” with significant government shareholding was mooted in the pre-Budget Economic Survey, and has subsequently been commented upon also by RBI Deputy Governor Viral Acharya.    

The problem is not new, but so far it seems to have produced more acronyms than progress on the ground. The Sick Industrial Companies Act was enacted in 1983; its repeal was authorised in 2003; the actual repeal notification came only in November 2016 — an indication of the urgency attached to the issue by successive governments? Debt Recovery Tribunals were formed in 2011 to expedite the legal proceedings in respect of debt recovery. They do not seem to have made much of an impact. In 2015, the government announced a seven-point programme (Indradhanush) to improve the working of public sector banks. It included separation of the incumbency of the chairman of the Board and the chief executive of the bank; the constitution of a Banks Board Bureau to improve board governance; de-stressing of banks’ balance sheets by tackling the issue of bad debts etc. This initiative also seems to have gone nowhere. A new bankruptcy code was framed last year. In the meantime, gross NPAs have shot up from Rs 3 lakh crore at the end of September 2015 to Rs 6.20 lakh crore in just five quarters! Equally worrying is the fall in bank lending to business in the last quarter. One hopes this was more the result of the temporary distraction of bank managements because of demonetisation — and not a reluctance to take lending decisions because of worries about the vigilance authorities, the enforcement directorate, the Central Bureau of Investigation, the public accounts committee of Parliament etc. Are such worries also hampering decision-making in general?

The central bank, in its role as banking regulator, has not been lagging behind in initiating new schemes to mitigate the problem: These include the flexible refinancing of infrastructure (5/25) scheme, Strategic Debt Restructuring, the Scheme for Sustainable Structuring of Stressed Assets etc. Now comes the bad bank or banks; a public assets reconstruction agency, according to the Economic Survey; and two separate agencies according to the proposal mooted by the deputy governor. The major problem is going to be funding. Public sector banks need a huge amount of equity funding in the next couple of years, not only to write off/provide for or sell bad debts but also to meet the Basel III capital requirements. As per present plans, apart from the Rs 25,000 crore each of them provided in the last and current fiscal years, the government has planned to inject Rs 10,000 crore each in 2017-18 and 2018-19. The aggregate of Rs 70,000 crore is just a fraction of the total amount that would be needed. The money will have to be found through both budgetary resources and using the RBI’s balance sheet. 

To my mind, it is only just that the necessary funding is provided by the government and the central bank — after all, surely they are at least partly responsible for the state of affairs in the banking industry. For one thing, the government’s fiscal limitations have led to many projects, particularly in the infrastructure sector, which should normally be funded by public resources, to be financed by commercial banks. Such projects are particularly prone to delays and cost escalation because of the umpteen clearances required. No wonder these form a significant part of the NPAs. As for the central bank, surely the supervision of the banking system was weak if it allowed the problem of bad debt to keep mounting year after year. More directly, I believe its exchange rate policy of the last seven to eight years has also contributed to the weakness in the tradeables sector. One example is the steel industry, one of the largest contributors to the problem of bad debts. It has been hit not only by the global softness in commodity prices in recent years, but also by the appreciation of the rupee in real terms. 

It is not just crony capitalism, dishonest businessmen, incompetent and/or corrupt bankers who are responsible for the bad debt problem in public sector banks.

The author is chairman, A V Rajwade & Co Pvt Ltd; avrajwade@gmail.com