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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 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
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.)