The banking sector has been a key focus area of the Narendra Modi government, which announced three key initiatives to restore the health of state-owned banks burdened by a mountain of bad loans. Apart from the Indradhanush plan of bank reforms and the Rs 2.11 lakh crore recapitalisation, the Insolvency and Bankruptcy Code (IBC) is likely to emerge as the turning point for PSU banks battling elevated non-performing assets (NPAs) and a culture of non-repayment of loans.
To be sure, the problems of PSU banks will not disappear anytime soon, with a total of eleven banks under the RBI’s Prompt Corrective Action (PCA) while the remaining ten are struggling to grow their loan book. PCA kicks in when banks breach any of the three key regulatory trigger points — capital adequacy ratio, net NPA and Return on Assets. PCA banks are restricted from increasing the size of their loan book, paying dividend and opening new branches, among others. To bypass these constraints, the government is working on a twin-edged strategy which expands the large and better run banks to support the economy, while weak banks are cut to size and made to focus only on retail loans.
The government’s view is that the PSU banks, which account for over 70 per cent of the economy’s assets, have seen the worst with most NPAs being recognised and resolution put in motion. The IBC, which mandates a time-bound resolution, would push up recovery of NPAs, improving banks finances going forward.
* After enacting the IBC, the government amended the Banking Regulation Act to give the Reserve Bank of India (RBI) more powers to deal with NPAs. This led to the RBI asking banks to push 12 large NPA cases to the National Company Law Tribunal (NCLT) benches for time-bound resolution.
The first large case of Bhushan Steel has been successfully resolved and the government has said that Rs 36,400 crore will come back to banks. However, many more cases are facing legal challenges.
* In August 2015, the government launched ‘Indradhanush’ to reform PSU banks, which provided for Rs 70,000 crore of equity infusion over a four-year period. The banks were to raise another Rs 1.1 lakh crore from the market and internal profits.
* As the initial plans failed to generate the desired result, the government announced mega recapitalisation plan to inject Rs 2.11 lakh crore of equity in the PSU banks in October 2017. It comprised Rs 1.35 lakh crore infusion via recapitalisation bonds, Rs 18,000 from budgetary resources and Rs 58,000 crore from the market.
* In January, Rs 80,000 crore was infused in PSBs. Eleven weak banks got Rs 52,311 crore, while nine strong banks received Rs 35,828 crore.
* State Bank of India completed the merger of State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore and Bharatiya Mahila Bank with itself.
* Notified the Fugitive Economic Offenders Ordinance 2018 that provides for confiscating properties and assets of economic offenders like loan defaulters who flee the country.
What’s in progress
* With companies accounting for the lion’s share of bad loans, the government is preparing to trim the corporate loan exposure of weak banks, especially that of the eleven PCA banks. The corporate and industry loans accounted for over 73 per cent of the total NPAs of the banking sector in 2016-17.
* The government has asked smaller banks to cut their corporate loan exposure to either below 40 per cent by March 2019 or by at least 15 per cent from September 2017 level.
* While large accounts are undergoing resolution at various NCLT benches, the banks are also auditing loan accounts above Rs 50 crore for any possible fraud. The accounts where fraud is detected will be referred to the Central Bureau of Investigation after consultations with the Chief Vigilance Officers of the respective banks.
* Banks have also started collecting passport details of borrowers taking loans of Rs 50 crore and more in order to prevent fraudsters from fleeing.
* The recovery of bad loans has been elusive so far. It is expected to pick up as resolution of large cases at NCLT is completed. Almost 90 per cent of the NPAs written-off by PSBs could not be recovered during 2014-15 to 2017-18, as per RBI data.
* Recovery rate for half of the 21 PSBs was lower than this. In the last four fiscal years — FY15, FY16, FY17 and FY18 till Dec 31 — all 21 PSBs could recover only Rs 29,343 crore out of Rs 2.72 lakh crore of written-off bad loans, a 10.77 per cent recovery rate.
* Of Rs 9 lakh crore of stressed assets, around Rs 4 lakh crore of assets are currently undergoing resolution under the IBC. The remaining are yet to be put through resolution.