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Large numbers are generally used to grab attention to a crisis.RBI Deputy Governor K.C. Chakrabarty, known for his outspoken views, did exactly that when he said that Indian banks have written off a whopping Rs 1 lakh crore over a period of 13 years.
Well Rs 1 lakh crore or Rs 1 trillion is definitely a large figure, but when you spread it over a period of 13 years it is equivalent to Rs 7,692 crore every year. That is not too big a number given the fact that SBI alone in September 2013 quarter wrote off assets worth 1,253 crore. Size of Indian banking industry is around Rs 77 lakh crore or Rs 77 trillion. However, the amount is large given the fact that banks annually make a profit of around Rs 72,000 crore.
More than the write-offs, the more important factor is the number of loans turning bad every quarter and the huge pile of restructured loans (which technically are bad loans). During the September 2013 quarter alone, non-performing assets(NPA) of Indian banks increased by 63% to Rs 21,233 crore as compared to Rs 13,000 crore in the same period previous year. On the other hand, loans restructured have touched Rs 3.25 lakh crore by June 2013.
Out of the total restructured loans, Rs 2.75 lakh cr went through the corporate debt restructuring(CDR) process and nearly 95% of the loans written off are from large corporates.
This raises a number of questions both on the banking system as well as the external environment.
Either the bankers capability of scrutinizing loans is under stress or the competitive environment is compelling them to disburse loans rather than lose a client. A little bit of both seems to be the case.
Chakrabarty has said that the banks have extended loans to sectors already having high levels of NPAs, thus raising the capability question. Bank managers, in order to meet their advances and deposit targets have been under pressure to clear loans, which under normal circumstances would not have been the case.
ICICI Bank, one of the first to move aggressively to disburse loans was also one of the first to withdraw from the corporate sector as their non performing loans shot up a few years back. The bank posted robust growth on back of concentrating on the retail segment.
But banks alone cannot be blamed for disbursements. Every loan, especially one extended to corporates are disbursed on the basis of the 'rating' by a rating agency. Now rating agencies derive their fees from the corporate they are supposed to rate. Any investor banker worth his salt will tell you which agencies can give a favourable rating.
Another reason for high defaults by corporates as compared to individuals is the fact that as a corporate, personal liabilities of the promoters are protected, unless of course they have given personal guarantees to the bank. An individual out of fear of his reputation or under 'threat' normally pays up, if not the full amount then at least the principal. But in the case of a corporate, the promoter rarely speaks to the bank, it is either his finance manager or the investment banker who is the interface.
To be fair to the smaller companies, most of them are victims of the external environment. An entrepreneur generally pledges his house to see to it that his business succeeds. But some of the bigger corporates, because of their political clout are able to go scot free.
Some of the biggest and most respected corporate houses in the country do have subsidiaries approaching banks for a debt restructuring while they are making a lot of money in other subsidiaries. While there is nothing wrong as such entities are legally seperate companies, a smaller entrepreneur under pressure from the bank will route his money from one entity to another. But the banks are unable to force large corporate houses to use the same measures and pay up.
In order to correct their mistakes, banks have almost stopped processing new loans. Growth in loan advances that we are currently seeing are normally top up loans. They feel it is safer to invest the money in government bonds rather than give it as loans which are expected to go bad sooner or later. Rising bad loans and write offs has made its contribution in slowing down the economy.
We have heard politicians and economists talk about leakages in the public distribution system (PDS) that hurt the economy. It now seems that leakages in the banking system is a bigger worry, one which is not as easy and visible to solve as the PDS.
