It is an acknowledged fact that the Indian banking system is facing an unprecedented crisis. The problem of bad loans and the need for a capital infusion, drastic changes in financial policies, new legislation introduced in the name of saving the banking system, the slowdown in the economy, proposal to merge public sector banks (PSBs) and eventual disinvestments are collectively drowning public sector banking system. The estimated non-performing assets (NPAs) are around Rs 6 lakh crores, the interest not charged is around Rs 1 lakh crores, and the restructured loans are around Rs 4 lakh crores totalling Rs 11 lakh crores, out of which the contribution of the large borrowers with loan exposure of Rs 5 crores and above is approximately 90 percent. Even this does not reveal the complete picture of total bad loans due to tot he refinancing of the loans to many big corporates. There are speculations that categorising some of the refinanced loans as NPAs might even bankrupt the lenders. To understand the crisis in its entirety, it is important to understand the various components that have together brought the public sector banking to its current predicament.
Legislative actions:
In the last couple of years, the government has passed a few legislations to address the NPA crisis. The Insolvency and Bankruptcy Code (IBC), 2016, the Banking Regulation (Amendment) Ordinance, 2017 and the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 are a few laws, which are hailed as solutions. Various legislations, that govern bankruptcy, have been brought into the fold of the IBC, governed by the Insolvency and Bankruptcy Board of India (IBBI), making the existing Board for Industrial and Financial Reconstruction (BIFR) redundant. It has been credited to be a solution that can timely deliver the wilful defaulters. However, a closer look does not instil much hope. The National Company Law Tribunal (NCLT), the adjudicating body, currently has 11 benches, 16 judicial members and seven technicians and it is this body that has to deal with over 4000 cases that are being filed annually! Not to mention the 4000 odd cases already existing in BIFR which will now be transferred to the NCLT for a fresh filing under the IBC. There is no provision from the government to strengthen the NCLT’s infrastructure, as yet.
The banking ordinance is another much-needed action from the government which again has to be taken with a pinch of salt. The ordinance amended the Banking Regulation Act, 1949. Two new sections 35AA and 35AB have been added to the Act, which empowers the Government of India to authorise the Reserve Bank of India (RBI) to issue directions to the banks to initiate insolvency proceedings under IBC against a defaulter. So far, the RBI has directed initiation of insolvency against 12 companies. However, in an order dated June 13, 2017, RBI has also ordered the banks to set aside up to 100 percent provisions for bad loans, in a case of liquidation. Keeping provisions for over 100 cases of defaulted loans at a time when the banks are already in need of capital infusion, which is again due to NPAs and demonetisation policy of the government, will be a severe blow to the banks.
IBC has already been operational for more than a year and so far only three banks- Industrial Credit and Investment Corporation of India (ICICI), Ratnakar Bank Limited (RBL) and Bank of India (BoI)- have approached the NCLT for recovery of NPAs. In such a situation, will introducing an ordinance make any difference? Even if the bankers approach IBBI, will the over-burdened NCLT be able to deliver? Most of these companies are those that hold a political clout. Will the bankers be able to initiate insolvency against them?
The worst of all this is the Financial Resolution and Deposit Insurance Bill, 2017. According to the Bill, a Resolution Corporation with a government-nominated board will be set up, which would overtake the functions of the financial institutions in case there are proceedings against the same. The board would have sweeping powers to liquidate, acquire, merge, and amalgamate any national bank including State Bank of India (SBI), Regional Rural Banks (RRBs), Cooperatives, National Insurance Company and non-banking financial institutions. If passed, this Bill could potentially end public sector, especially the public sector banking. This puts most of the PSBs under the threat of being liquidated. One might argue that if the banks go bankrupt, then the government has no other way out but to close them. However, it is a fact that 88.4 percent of the total NPAs was created by large borrowers, with the exposure of Rs 5 crores. The 12 large borrowers alone constitute 25 percent of NPAs. It has been more than two years since the Supreme Court directed the RBI to disclose the names of wilful defaulters but the RBI and the government are unwilling to reveal the names even today. Instead, there is a systematic effort to finish the public-sector banks.
Bank mergers:
The government has repeatedly talked about the reduction of the number of public banks from twenty-seven to five or six, with the aim of creating global sized ╘lender╒. It was recently reported that the finance ministry had asked four more public sector banks to explore the possibility of a merger with other smaller banks. The likely candidates so far are Punjab National Bank (PNB), Canara Bank, Bank of Baroda, and Bank of India. The official timeline for these mergers has not been fixed, but the banks have already made a preliminary presentation to the finance ministry.
These mergers have been initiated citing the ‘success’ of State Bank of India╒s merger with five of its associate banks and Bharatiya Mahila Bank on April 1, 2017. The merger has been portrayed as a smooth merger despite various protests by bank unions and disregarding many of their concerns. Secondly, it was claimed to be a ‘success’ that has catapulted SBI into top 50 global banks in terms of its assets, expanding its customer base to Rs 37 crores, with a deposit base of Rs 26 Lakh crore. SBI chairperson Arundhati Bhattacharya estimated a Rs 3000 crore boost in the annual profit in three years. What SBI and the finance ministry are silent about is the recent quarterly results on May this year, which saw the net profit of SBI group declining from Rs 10,965 crores in the third quarter of 2016 to Rs 3,219 crores in the same period for the year 2017. Following the quarterly disclosure, SBI’s shares fell by 4.6 percent. At the end of December 2016, SBI’s losses were estimated at Rs 4,550 crores. There has not been any explanation from SBI for the additional loss of Rs 5792 crores incurred after the merger. Very less has been covered by the media on how the associate banks’ losses have slowed SBI’s profit. Neither has there been any explanation by the Bank for such a huge loss nor has anyone been held accountable for the lack of due diligence. Despite this revelation, which invalidates the argument that merger will increase the assets of a bank, the government is hell-bent on more mergers, when even rating agencies have shown scepticism of its effectiveness in fighting NPAs.
Bad Loans:
The debate on NPAs has mostly been limited to the enormity of the amount, but the question of why and how we got there is conveniently brushed aside in the one-liner of faulty lending practices. It is a fact that the banks have been increasing lending to big businesses in the last few decades, which has landed them on this minefield of their making. Six sectors, ‘infrastructure, textiles, metals, chemicals, engineering and mining,’ all non-priority sector, contribute to 36 percent of the total bad loans. Hence, a debate on the problem of NPAs without accounting for the changes in the lending practices over the last few decades would be to miss the wood for the trees.
A few significant shifts in the lending practices are worth noting to understand how banks have systematically moved away from a social welfare model to the one that caters to big corporate. Earlier, there was a focus on priority sector lending, under which close to 90 percent were given for small-scale lending. However, this has reduced drastically. Even out of the 18 percent loans being given to agriculture now, most of them are appropriated by the big agro-industries, which have benefited from RBI╒s removal of the distinction between direct and indirect agriculture. A mere 8 percent goes to small and marginal farmers.
Similar trends are seen in industrial lending as well. According to the news reports, the share of small and micro industries in total bank credit to industry went down from 15.5 percent in 2007-08 to 13.6 percent in 2015-16. Likewise, the proportion of medium-scale industry fell from 12.9 percent to 4.2 percent over the same period, whereas the share of large industries went up from 71.6 percent to 82.2 percent. In 2015-16, 55 percent of the increase in bank loans to industry went to the infrastructure sector and 38 percent to the iron and steel industry. It is these two sectors that have today contributed to the maximum NPAs. Disproportionate to the lending, the industrial sector has been under stagnation for the last three decades. Hence, the problem of NPAs is a result of the neo-liberal policies of the government.
Privatising Public-Sector Banks:
Attempts to privatise the public sector banks have been ongoing since the economic reforms of 1991, but due to stiff resistance from the banking sector, the government has not been able to succeed. However, this crisis is today being used as an opportunity to overhaul the banking system as we know it. The strategy of merging small banks to create a few ‘lending giants’ along with the introduction of payment banks is a perfect way to end brick and mortar branches. The changes in legislations are not promising when the RBI, on one hand, directs banks to file bankruptcy proceedings against companies and on the other orders them to keep 100 percent provisions for bad loans in case of liquidation! The proposals of ‘haircuts’ (a fancy term for write-offs), the policy of demonetisation, evergreening of loans, and selling bad loans at a pittance to asset reconstruction companies are all measures that would further weaken the public sector banks, but bring in private financial institutions. With years of propaganda of an inefficient public sector, a climate of disinvestment is only perfect for a bill that can liquidate any public sector financial institution!
Conclusion
While the public sector has many challenges that need to be addressed, one cannot undermine the role that PSBs played in the development of rural economy. In 1977 the government passed a regulation requiring banks to open four branches in rural (unbanked) areas for every branch opened in banked areas to ensure banking accessibility across the spectrum. India Policy Forum’s 2004 report corroborates that for every 1 percent increase in banks public-sector, there is a 0.42 percent decrease in poverty and 0.32 percent increase in per capita output. However, this policy was repealed in 1990 by RBI, resulting in a reduction of rural branches from 33,004 to 32,082 between 1995 and 2005. Despite RBI’s claims of financial inclusion, there is seen a steady decline in the number of rural branches. So much so that even till now it is the money lenders and other informal sources that are the primary lending sources in the rural areas, resulting in, among many other things, increase in farmer’s suicides. Hence, withdrawal of public sector from rural and priority sector would only harm the marginal sections of the society.
Banks apart, almost all public sector institutions have helped in laying the backbone of this country. The sorry state in which they are today is partly also the result of directionless policy making of successive market-oriented governments, lack of political will and their capitulation to neo-liberal policies. What is being witnessed in the case of banks is symptomatic of a larger malice of privatisation of the public sector, whether industries, railways, or the latest Air India.
Hence, what we are facing today in the banking sector is not just an NPA crisis, but also a conscious effort to reverse the nationalisation of banks and to end public sector. This is not a problem limited to banking sector alone, but one that is going to marginalise the disadvantaged sections of the society further. In the times of jobless growth, these policies would retrench hundreds of people. There is no alternative to resistance for this attack on the fundamental structure of our economy.