Opinion Failing the bank

Finance Minister Arun Jaitley arrives in Parliament to present the Union budget for 2017-18. (PTI Photo)

This year’s budget has barely addressed the issue of pile-up of bad loans, with the government providing just Rs 10,000 crore, much lower than the Rs 25,000 crore allocated last year, which was considered inadequate then. Hopefully, this means that the government is working on solutions outside of the budget, and not that it thinks that the problem can be wished away once growth rebounds or by the deluge in deposits post demonetisation which led to a reduction in bank rates. That would be delusionary considering that a large chunk of these deposits may not be of an enduring nature given the circumstances after November last year when the government announced a ban on Rs 500 and Rs 100 notes.

Over a dozen state-owned banks, accounting for 40 per cent of total loans, have over 20 per cent of their outstanding loans classified as restructured or as Non Performing Assets (NPAs). The prospects of bad loans rising appear to be higher given that efforts at recovery by banks have been hampered because of bankers being bogged down with work related to demonetisation. As this year’s Economic Survey pointed out, at the current level, India’s NPA ratio is higher than any other emerging market barring Russia and higher than the peak level seen in Korea at the height of the Asian crisis. This government, while criticising the legacy of bad loans it inherited in 2014, had promised an overhaul — which led to the RBI launching an Asset Quality Review and setting a target of March 2017 to clean up bank balance sheets and the setting up of the Bank Boards Bureau (BBB) to help professionalise the boards of state-owned banks. On both counts, the results appear to be underwhelming. It is doubtful whether the focus on asset quality review is being maintained after the ban on high-value notes, because banks have been hamstrung in terms of recovery of some of these assets while the BBB’s role has been limited to mainly recommending the names of candidates to senior management positions in state-run banks.

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All this comes at a time when loan growth is at a multi-decadal low with RBI data showing that loans to small, medium and large firms shrank 4.3 per cent in the 12 months ending December 2016. There is no sign of the creative solutions that RBI Governor Urjit Patel had said were needed to address a tall challenge. A proposal has been floated by the government to create a Public Sector Asset Rehabilitation Agency which would buy out the bad loans and help clean up the books of banks — with the attendant risks of a moral hazard and criticism of the use of public funds — but the central bank had opposed it in the past. Overall, the handling of state-owned banks by successive governments, marked by a reluctance to carry out fundamental reforms such as professionalising the boards of listed state-owned banks and providing operational autonomy, is distressing. Unless the government moves fast to repair the damage, when growth comes back, banks may not be in a position to lend.