The governor of the Reserve Bank of India (RBI), Raghuram Rajan, said earlier this month that he expected banks to clean up their books in terms of stressed assets by the end of the next financial year - that is, by March 2017. Stressed assets - which include both bad loans officially classified as non-performing assets (NPAs) and those that are undergoing corporate debt restructuring (CDR) - accounted for a worrying 11.1 per cent of total advances as of last quarter. Non-performing assets rose over 20 per cent year-on-year in the quarter ended September, as a significant number of loans moved out of the CDR books. The RBI has insisted that it will examine bank balance sheets closely, and that proper provisioning for bad assets will have to be made.
The RBI, as regulator, has already taken several steps to help banks deal with the stressed-assets problem - including strategic debt restructuring, in which the debt is turned into equity. The latter move cannot be anything but an interim effort, however, given that banks do not have the managerial competence or resources to effectively become private equity firms. Another method the RBI has permitted to deal with problematic loans is what is called the "5/25" system, by which loans to infrastructure companies are extended in tenure. These too will have to be closely watched. Earlier, CDR assets did not have the onerous provisioning requirements associated with NPAs, and so there was concern that banks were playing around with the classifications to make their books look better. The RBI has closed that loophole. Thus, while NPAs may rise, several observers, including the ratings agency Fitch, expect that stressed assets as a whole may decline marginally in the ongoing financial year as compared to 2014-15.
It is worth noting, however, that the problem of bad loans is one that is particularly acute in public-sector banks (PSBs), and so significant matching action must be taken by their primary shareholder, the government. The RBI cannot be left doing all the heavy lifting. The problem is particularly acute in mid-sized PSBs like Indian Overseas Bank or UCO Bank. The former reported NPAs at 11 per cent in the quarter ended September. It has been reported that the government intends to use part of the proposed National Infrastructure Investment Fund (NIIF) to bid for stressed assets that it can then work to turn around, while simultaneously cleaning up bank books. This was not the original plan for the NIIF, which was meant to be a source of long-term infrastructure finance; however, if managed properly, using part of NIIF as, in essence, a "bad bank" could minimise the disruption involved in the clean-up process.
However, that is the government thinking as manager of the Indian economy and provider of basic infrastructure, not as bank owner. As the latter, it must also work with the regulator to ensure that banking practices improve in PSBs. For one, it should be wary of forcing multiple lending priorities on its banks - financing specific infrastructure or agricultural needs, or taking on the loans associated with the MUDRA Bank refinancer, or for that matter dealing with the Jan-Dhan Yojana accounts unless they are properly remunerative. Politically and administratively, the government should be aware that the state-owned banking sector is undergoing extreme fragility, and this is not the time to stress it further with various "nation-building" demands, particularly when it is reluctant to take bold steps that entail their fundamental restructuring. It should also work to ensure their structural and operational independence. A bank holding company as recommended by the P J Nayak Committee should not be long delayed, even though it would require legislative assent.
