PSU defaults, moral hazards: Can banks keep relying on govt ownership?

One could hear a collective sigh of relief from the Indian banking sector when the bankers learnt that the government was considering a bailout for the Mahanagar Telephone Nigam Limited (MTNL) and the Rashtriya Ispat Nigam Lid (RINL), both Navratna public sector undertakings (PSUs). The telecom and steel ministries have been discussing this with the finance ministry.

A committee of secretaries from the departments of expenditure, investment and public asset management, and telecommunications will take the final call on MTNL’s debt.

On September 25, the State Bank of India (SBI) downgraded its MTNL exposure as a non-performing asset (NPA) due to non-payment of instalments and interest since June 30. Ahead of that, in mid-September, Punjab National Bank (PNB) had joined others to downgrade the account.

For SBI, the total outstanding on the MTNL loan account was Rs 325.52 crore as of September 30, according to the bank's letter dated October 1, shared by the company with the stock exchanges. Going by MTNL's September 13 filing with stock exchanges, the outstanding amount for PNB is Rs 441 crore and the overdue at least Rs 46 crore.

Ahead of that, MTNL disclosed that it had defaulted on Rs 519 crore in repayments to several state-owned lenders between June and August 2024.

MTNL is a listed entity, owned 56.25 per cent by the government of India and 13.12 per cent by the Life Insurance Corporation of India. In March 2024, it had a Rs 23,663 crore hole in its net worth, after posting a net loss of Rs 3,302 crore in FY24 on top of the Rs 2,915.1 crore loss posted in FY23.

It is burdened with about Rs 35,600 crore debt, of which Rs 27,700 crore are bonds guaranteed by the central government. These bonds continue to be rated as “AAA (CE)”. CE highlights the credit enhancement on account of the government guarantee. The balance exposure of about Rs 7,900 crore is by way of term loans and working capital from a clutch of banks, including Union Bank of India, Bank of India, SBI, PNB, Punjab & Sind Bank and Uco Bank.

RINL, commonly known as Vizag Steel, is 100 per cent owned by the government. It had posted a loss of Rs 2,858 crore in FY23 (the latest available audited numbers). Its net worth was Rs 391 crore in March 2023, but this has been wiped out as the company reported a net loss of Rs 2,058 crore in the first half of FY24. 

RINL has a total debt of Rs 20,413 crore – term loan of Rs 10,812 crore and working capital worth Rs9,601 crore. Like MTNL, it also started defaulting in June. It seems that all banks have classified both RINL and MTNL accounts as bad loans in the September quarter.

On top of the term loan and working capital exposure, banks have non-fund exposures to these two companies in the form of letters of credit and guarantees. Most of that exposure will also devolve on lenders (as it gets converted to funded facilities). They may have to write it off if the government does not step in.

The government granted the Navratna status to MTNL in July 1997 and RINL in November 2010. The Navratna companies are central public sector enterprises and considered to be important to India’s economy. They enjoy autonomy in areas like capital expenditure, investment in subsidiaries and joint ventures, and human resource management.

MTNL was set up on April 1, 1986 to upgrade the quality of telecom services, expand the telecom network, introduce new services and raise revenue for the telecom development needs of India's key metros: Delhi and Mumbai. Mumbai is where India’s first telephone exchange was set up in 1882.

The MTNL website, last updated in February 2018, has stopped mentioning the milestones it has achieved since 2012. Past milestones include introduction of voicemail service in 1992, setting up of wholly-owned subsidiaries such as Millennium Telecom Ltd in 2000 and Mahanagar Telephone Mauritius Ltd in 2003, and the launch of 3G mobile service in 2008.

Recently, the government assured the banking industry that MTNL would not default to the bond holders and its operations would be transferred to Bharat Sanchar Nigam Ltd (BSNL), a Miniratna. Efforts to monetise its assets to pay off bank dues have also been on, telecom minister Jyotiraditya Scindia has said. Until that happens, the government will stand by its guarantee to the bonds.

The telecom company had earlier offered to settle the bank debt at a 60 per cent discount, but that was not to the lenders’ liking.

Generally, lending to PSUs is considered safe. However, there have been multiple instances of defaults, and banks have taken haircuts in lending to them. Many loans to the cooperatives in the sugar and textile sectors were also written off in the past, the effects of which are visible even today in poor credit flow to the cooperative sector.

In private, bankers do talk about their experience with PSUs when it comes to lending. The petition to wind up STCL Ltd (earlier called Spices Trading Company Ltd), a 100 per cent subsidiary of State Trading Corporation of India Ltd (STC), a Miniratna PSU, has been pending in Karnataka High Court for over a decade now. The Enforcement Directorate attached the assets of STCL under FEMA/PMLA in 2021.

In March 2023, STCL owed Rs 4,559 crore to a consortium of eight public and private banks. The recovery cases have been lying with the Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT).

Similarly, there will be next to nothing recovery from STC, owned 90 per cent by the government. It ceased operations in 2021. In March 2024, it owed Rs 806 crore to a consortium of six banks. The recovery cases have been pending before DRT and the National Company Law Tribunal (NCLT).

In the case of Hindustan Newsprint Ltd, a wholly-owned subsidiary of Hindustan Paper Corporation Ltd, a central Miniratna PSU, banks took a haircut of about 65 per cent. The deal was done under the Insolvency and Bankruptcy Code (IBC) through the NCLT process and not through private negotiations by the ministry, as is happening with MTNL and RINL.

Incidentally, bankers lose out on lending to state governments as well. Banks suffered losses in 2016 on food credit extended to the government of Punjab. Andhra Pradesh tried to renegotiate the power-purchase agreement for renewable energy entered into by the previous government. The project developers and lenders would have suffered a huge loss had it not been for the court’s intervention. Such instances erode investor confidence in projects and could make credit flow scarce and costlier.

The Reserve Bank of India’s regulations do not provide any forbearance to defaults by PSUs vis-à-vis the private sector. The PSUs are, however, excluded from group exposure norms. This is in sync with the international practice – the exposure to the sovereign is not cumulative.

However, these instances of default and write-off erode the confidence of banks in lending to PSUs, which are generally perceived to be inefficient. How long will the banking system bank on government ownership?

The decision to settle RINL and MTNL’s debt is reportedly being taken by the Committee of Secretaries and not by the group of lenders. The IBC is the law of the land, and there is a market mechanism to find true value. In contrast, private negotiations always depend on the strength of the negotiating parties. Particularly when government is the negotiator, will the government-owned banks be able to bargain hard? On top of that, this is fraught with moral hazards as well. 

MTNL and RINL aren’t good stories, particularly when both lenders and investors are getting their appetite for the infrastructure sector back.

The writer is an author and senior advisor to Jana Small Finance Bank Ltd.

His latest book: Roller Coaster: An Affair with Banking. 

To read his previous columns, please log on to www.bankerstrust.in

X: @TamalBandyo