When the State Bank of India reported a quarterly net loss on February 9, the first for India's biggest lender in 17 years, the problem of rising loan defaults was once again on display. Three days later, the Reserve Bank of India forced the 200-year-old bank to state that it had actually understated the losses in its loan book.
That was an atrocious slip-up by SBI and a sign of the broken trust at a time when the government is pushing through a multi-lakh crore public bank recapitalization plan. When the government plans a capital infusion of Rs 2.11 lakh crore by various means (as per the announcement on 24 October 2017), it's basically the people of the country who underwrite that spending. For the sake of defaulters.
It's technically right to say that the recapitalization is the right thing to do now. Public sector banks have run into deep trouble and there's no better way to deal with it than infuse them with fresh capital so that they can lend more, so that the asset quality improves, so that the stock prices improve. It's also right to say that the NPA ballooned because of the economic slump. But that's only a naive, even callous approach. The rising NPAs reflect poor governance, corruption in the system and a general lack of aggression in recouping bad loans.
As eminent journalist TN Ninan wrote in a column: "... Since there is no option ... we will go back to the one that is easiest to do: take more of the taxpayer's money and give it to the banks."
And who are to blame? "So who exactly is laughing all the way to (or from) the bank? Perhaps there is a need for some anger here. But who do we get angry with? The government (who is the shareholder on our behalf)? The regulator, which is the Reserve Bank? Bank managements? Bank employees' trade unions? Those who took the money and became rich while defaulting? Or all of them?
However, mainstream reporting on NPAs, loan write-offs and bank recapitalisation mostly dwell in the numbers' realm. It's not exactly some 'factoid reporting' but something dangerously close to that. Number crunching that papers over substantial questions. That's what independent analyst Hemindra Hazari exposes in this article as "the media circus that constitutes business journalism."
Bad loans in public and private sectors
The gross non-performing assets stood at Rs 7.6 lakh crore at the end of FY 2017. More slippages are estimated this fiscal, and the GNPA is projected to rise to almost 9 lakh crore. That's the numbers for the public sector banks, which the government owns on behalf of the tax payers.
Contrast this with the bad loans in the private sector banks; As per data placed in parliament by Finance Minister Arun Jaitley, the gross NPAs of private banks as of August 2017 was Rs.73,842 crore. That's less than 10 percent of the public sector NPAs. Surely there isn't more accountability and better governance in the private sector? Surely the private sector isn't a freeloaders' paradise like the public sector?
Bank recapitalisation has its storied benefits - nobody takes anything away from the economic wizards. It's a solution to NPAs, it helps banks recover from the impact of steep NPA provisioning. It lets banks extend their loan book, thus passing off the benefits to the broader economy in the process. And recapitalization helps share prices go up, resulting in the banks' ability to raise more capital from the markets.
How about the cost side? As per the current plan, the government will infuse Rs 1.5 lakh crore of public funds through budgetary provisions as well as through recapitalization bonds. In comparison, the entire bank recapitalization funds between 1985 and 1999 was only about 20,000 crore.
Recapitalisation and its moral cost
Whether it's through recapitalization bonds or through direct infusion of capital, the direct impact is on the government's fiscal deficit and the interest burden. "The true fiscal cost of issuing the 1.35 lakh crore recapitalisation bonds is the interest payment of about ₹8,000-9,000 crore," said Arvind Subramanian, Chief Economic Advisor (CEA). That's just the 'true fiscal cost'. Add to that the moral cost!
Indians' per capita public debt was Rs 49,270 at the end of 2015, according to statistics tabled by Jaitley in Parliament. That was a steep increase of about Rs 20,000 in five years. The bank recapitalisation, among other things, adds to this pile -- let's say to the tune of Rs 10,000 on the head of each Indian.
The unavoidable, inevitable public largesse on defaulters and their abettors also encourages lax governance and a lack of probity. Unless generous capital infusion is followed up with better compliance, more aggressive recovery and more effective guard against bad lending, the vicious cycle will simply repeat.
India is sitting on a dangerous threshold - its bad loan ratio ranks among the worst in the world. At 9.85 percent (according to a Care Ratings report) at set to rise, it's far worse than that of all the BRICS nations. (Brazil - 3.69%, Russia- 9.72%, China - 1.75% and South Africa 2.83%)
The four countries whose bad loan ratios are worse than India's are Greece, Portugal, Italy and Ireland -- all at the centre of the great European debt crisis after veering close to a sovereign default. For comparison, the bad loan ratios in the US and UK are 1.15% and .99% respectively.
Without ensuring greater accountability, regulation, oversight and above all much higher levels of probity in public life, crises like this will continue to plague the country. If the bank chief buys his position and if that process is bankrolled by a dubious businessman who would extract his pound of flesh later, it's finally the country that bleeds. Over to TN Ninan again, to sum up:
"What about the government, which has been appointing all the senior people in banks for decades? It is no secret that many chief executives were buying their positions. One presumes the money was paid on their behalf by businessmen—who, you can bet, were favoured later with loans that would not bear scrutiny."