No bailout with taxpayer money

Delinquent corporate borrowers and negligent bankers need no state support. Development
Financial Institutions should be revived for industrial and infrastructure financing
ifice of parasitic, crony capitalism rather
than on enhancing the supposed ease of
doing business.
Credit-Suisse Securities Research and
Analytics has been closely tracking the
company financials of the 10 most severely debt-stressed corporate groups over
the past three years, namely Lanco, Jaypee, GMR, Videocon, GVK, Essar, Adani,
Reliance ADAG, JSW and Vedanta. Its latest House of Debt report (October 2015)
reveals that the combined debt of these 10
groups taken together have increased by
seven times in the past eight years to reach Rs. 7.33 lakh crore in 2014-15, accounting for nearly 10 per cent of the banking
systems gross advances. Credit-Suisses
analysis further shows that large chunks
of corporate debt are yet to be recognised
as stressed advances by the banking system, despite the solvency ratios of those
large companies crossing the danger
mark.

PRASENJIT BOSE

The banking sector in India

is in a crisis, with the burden of bad loans brewing
for some time now. As far
back as November 2014, the
Reserve Bank of India (RBI)
Governor castigated riskless capitalism
being enjoyed by Indian big businesses
while the profits of the boom period have
accrued as lucrative returns on their equity, the losses during the downturn have
accumulated as bad debt in the banking
system, particularly the public sector
banks. Little has happened since then by
way of corrective policies.
Two parliamentary committees the
Public Accounts Committee and the
Standing Committee on Finance have
meanwhile studied the problem of
stressed loans in the banking system and
expressed outrage, recommending measures such as forensic audit of bad loans.
The Finance Ministry is now reportedly
working towards the creation of a publicfunded asset reconstruction company
(ARC), which will buy off the bad debts
and cleanse the banks balance sheets. But
is such a bailout justified?
The stressed banking sector
According to RBI statistics, annual
growth of bank credit in India, which had
crossed 30 per cent in the boom years of
2004-2007, has markedly declined to
around 9.7 per cent in 2014-15 and further
down to 9.4 per cent in the first half of
2015-16. The decline in credit growth has
followed a severe decline in the profitability of scheduled commercial banks, with
public sector banks suffering the most in
this profit squeeze.
This is not surprising given the fact that
public sector banks are saddled with a disproportionate share of non-performing
and bad loans within the banking system.
As per RBIs banking statistics, out of Rs.
75.6 lakh crore gross advances made by all
scheduled commercial banks taken together till March 2015, a sum of Rs. 3.22
lakh crore was classified as non-performing assets (NPAs), taking the gross nonperforming advances (GNPA) to gross advances ratio to around 4.27. The public
sector banks accounted for 74 per cent of
the gross advances and 86 per cent of
GNPA of the scheduled commercial
banks in March 2015.
RBIs Financial Stability Report (FSR,
December 2015) states that out of the total
GNPA, the share of large borrowers
defined as having aggregate exposure of
Rs. 5 crore and above has increased
from 78 per cent in March 2015 to 87 per
cent in September 2015. These large bor-

The decline in credit growth has followed a severe decline in the profitability of
scheduled commercial banks, with public sector banks suffering the most in this
profit squeeze. Picture shows an SBI branch in Hyderabad. PHOTO: MOHAMMED YOUSUF

There is a nexus of
corrupt bankers,
unscrupulous businessmen
complicit auditors and an
easy-going regulator ripping
off the banking system
rowers are not farmers or small producers
but large or medium-sized corporates.
Moreover, the banks have been simply
rolling over a large volume of debt owed
by the large borrowers, mainly through
corporate debt restructuring, in order to
downplay the growing incidence of NPAs
and window-dress their balance sheets.
Restructured advances amounted to
over Rs. 5.24 lakh crore at end-March 2015.
This, added to Rs. 3.22 lakh crore of NPAs,
amounted to Rs. 8.47 lakh crore of
stressed advances in the banking sector
in 2014-15, accounting for 11.2 per cent of
the total gross advances of banks and
around 6.7 per cent of Indias GDP.
Such huge amounts of stressed assets in
the bank balance sheets persist despite
substantial debt write-offs that have already been made by the banks. As per RBI
data, NPAs totalling over Rs. 60,000 crore
were written off by the scheduled commercial banks in 2014-15. The beneficiaries of such largesse have remained unknown to the public.
The Finance Ministry had divulged earlier that the top 30 NPAs of the public sector banks amounted to over Rs. 95,000
crore in December 2014, which accounted

for over one-third of GNPAs of the public

sector banks. However, the Ministry also
cited Section 45E of the RBI Act and other
banking laws to withhold specific information regarding the defaulters. Only a
small list of wilful defaulters has been
made available, with Vijay Mallyas Kingfisher Airlines topping the list.
The Finance Ministry has recently revealed in Parliament that the public sector
banks have identified 7,265 cases of wilful defaulters till September 2015,
amounting to Rs. 64,334 crore, accounting
for around 20 per cent of the GNPAs of the
public sector banks. Out of this, FIRs have
been filed only in 1,624 cases (22 per cent)
involving Rs. 16,602 crore. It is clear that
not only are the laws and institutions related to recovery of debt and corporate
bankruptcy in India lax and loophole-ridden, the banks are themselves reluctant to
bring even the wilful defaulters to book.
The picture that emerges is one of a toxic nexus of unscrupulous businessmen,
negligent and corrupt bankers, complicit
auditors and an easy-going regulator ripping off the banking system, especially the
public sector banks. What this calls for is a
moratorium on corporate debt restructuring and non-transparent debt writeoffs, through which this scam is being perpetuated, and a complete overhaul of the
laws and regulations governing corporate
defaults and debt recovery. The penal provisions of the Insolvency and Bankruptcy
Code introduced in Parliament last December need to be further strengthened
in that direction. The focus of legislative
changes should be on dismantling the ed-

Misplaced priorities
A key systemic cause behind such intense corporate debt distress and the accumulation of bad loans within the public
sector banks is to be found in the premature euthanasia of the Development Financial Institutions (DFIs) in India. Following the recommendations of the
Narasimham Committee-II, DFIs like the
ICICI and IDBI, which were created in the
post-Independence period to provide
long-term finance for industry, were converted into universal commercial banks.
The committees presumptions regarding
the capacity and skills of the commercial
banks and capital markets in India being
sufficient in meeting the financing needs
of the industrial sector have turned out to
be gross overestimates. NPAs have not
only made a comeback, but are threatening the very stability of the banking
system.
Industrialisation and infrastructure development in developing economies like
ours is crucially dependent upon the
availability of long-term development finance with transparent state support. But
while DFI loans as a proportion to GDP
have increased significantly in countries
like Germany, Japan, China and Brazil between 2000 and 2010, it fell in India from
7.4 per cent to 0.8 per cent. Rather than
bailing out the delinquent corporate borrowers and negligent bankers using taxpayers money, the government would do
well to revive the DFIs, even create new
ones through fiscal support, in order to
bring transparency in industrial and infrastructure financing and restore the
credibility of the banking system.
(Prasenjit Bose is an economist and
political activist.)