Non-Performing Assets (NPAs), a euphemism for toxic or bad loans, has been looming over Public Sector Banks (PSBs) for over a year. C. P. Krishnan, the General Secretary of Bank Employees Federation of India (BEFI), says “the total NPA of the PSBs is around 6 lakh crores, on the top of it, the interest not charged is around 1 lakh crores, the restructured loans are around Rs.4 lakh crores. Out of the total NPA of Rs 11 lakh crores, the contribution from the large borrowers (credit exposure of Rs 5 crores and above) is close to 90%.” It is estimated that the PSBs are in dire need of a capital infusion of Rs 95,000 crores in the next two years to fulfil Basel III norms. As the largest shareholder of the PSBs, this responsibility lies with the government. The government has taken various steps in the name of tackling the crisis of the PSBs. These include passing the Insolvency and Bankruptcy Code (2016), Banking Regulation (Amendment) Ordinance (2017), Merger of the State Bank of India (SBI) with its associate banks and Bharatiya Mahila Bank and now the Financial Resolution and Deposit Insurance Bill (2017). Many of these have been hailed as the much-needed steps towards resolving the banking crisis, but are they intended to tackle the same?

One down, four more to go

There has been a constant threat of privatisation of the public sector (especially banking sector)  since structural adjustment reforms in 1991. Every successive government has employed new tactics to further this process,  reducing government equity and merging banks is just another page from the privatisation playbook. The story of IDBI from a development bank to a now privatised commercial bank stuck in a quagmire of NPA is an ominous forecast of PSBs.

The Modi government has repeatedly called for the reduction in the number of public banks from twenty-seven to five or six, by acquiring mid-size banks to create global sized ‘lender’. It has been reported recently that the finance ministry has asked four more PSBs to explore the possibility of a merger with other smaller banks. The likely candidates for merging smaller banks are Punjab National Bank, Canara Bank, Bank of Baroda, and Bank of India. There has not been any official timeline fixed for these mergers, but it is said that the banks have 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, overlooking the various protests by the bank unions and disregarding many of their concerns. Secondly, this move was claimed to be a ‘success’ as it has catapulted SBI into the top 50 global banks in terms of its assets, expanding its customer base to 37 crores, with a deposit base of Rs 26 lakh crores. Arundhati Bhattacharya, SBI’s chairperson, has estimated Rs 3000 crores boost in the annual profit of the bank in three years.

What SBI and the finance ministry are silent about is the recent quarterly results declared on May this year, which saw the net profit of SBI Group declining from Rs.10,965 crores in the third quarter of FY’16 to Rs.3,219 crores in the same period of FY’17.  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 4550 crores. There has not been any explanation from the 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 to its effectiveness in fighting NPAs.

Legislations and NPAs

Apart from the merger of PSBs, the government has also passed a handful of legislations as a solution to the ever-growing NPA crisis. Some of the legislations mentioned above include the Insolvency and Bankruptcy Code (IBC), 2016, and the Banking Regulation (Amendment) Ordinance, 2017. The passing of IBC 2016 brought various laws that govern bankruptcy into the fold of the Insolvency and Bankruptcy Board of India (IBBI). This has effectively made the existing Board for Industrial and Financial Reconstruction (BIFR) redundant. It has been cited as a solution that could help speedy resolution of  NPA related cases and unlock the value of assets. However, a closer look does not instil much hope. The National Company Law Tribunal (NCLT), the adjudicating body of default proceedings, is highly understaffed with only  11 benches, 16 judicial members, and seven technicians. It deals with over 4000 cases that are filed annually! This excludes 4000 cases, which already exists in BIFR and will now be transferred to the NCLT for a fresh filing under the IBC 2016. There has been no provision yet from the government to strengthen NCLT’s infrastructure. So far, only three banks, ICICI, RBL and BoI, have approached the NCLT for recovery of their NPAs.

The Banking Ordinance, 2017 is another ‘much needed’ action from the government which again needs be scrutinised. The ordinance amended the Banking Regulation Act, 1949. Two new sections — 35 AA and 35 AB — have been added to the Act, which empowers the government of India to authorise RBI to issue directions to the banks to initiate insolvency proceedings against a defaulter under the IBC 2016. The RBI has so far directed to initiate insolvency against 12 companies – Essar Steel (Rs 37,284 cr), Bhushan Steel (Rs. 44,478 cr), Lanco Infra (Rs. 44,365 cr), Bhushan Power (Rs 37,248 cr), Alok Industries (Rs 22,075 cr), Amtek Auto (Rs 14,075 cr), Monnet Ispat (Rs 12,115 cr), Electrosteel (Rs 10, 274 cr), Era Infra (Rs 10,065 cr), Jaypee Infratech (Rs 9,635 cr), ABG Shipyard (Rs 6,953 cr) and Jyoti Structures (Rs 5, 165 cr). Even though IBC has been operational for more than a year, so far only three banks have approached it for the resolution. Even if the bankers approach IBBI, will the over-burdened NCLT be able to deliver? Most of these companies are those that enjoy political clout. Essar Steel, one of the twelve companies, has already filed a petition in Gujarat high court to stay the proceeding against its insolvency case by the NCLT. It is only a matter of time that the other companies follow suit. Hence one wonders if the much-celebrated ordinance will bring any change? In such a situation, will the bankers be motivated to initiate insolvency against these companies?

The worst of all this is the Financial Resolution and Deposit Insurance Bill (FRDI), which was passed by the cabinet earlier this year. This bill paves the way to set up Resolution Corporation to deal with not the debtors but the banks and insurance companies that are not able to tackle their NPA problem! This puts most of the PSBs under the threat of being liquidated. One might argue, if the banks go bankrupt, then the government has no other way out but to close shut them. It has been more than two years since the Supreme Court had directed the RBI to disclose the names of the wilful defaulters, but the RBI and the government are not willing to reveal it. Instead, they are systematically trying to finish the PSBs.

Banks are seen as the stabilisers of the economy, and hence it is vital to have a sound and strong banking system at a time when there is an economic fluctuation. However, unfortunately, the government seems to think otherwise. The demonetisation policy of the government has had crippling effects on already burdened banks, so much that even IMF acknowledges the slowdown in economy post demonetisation. The mergers would only further push the banks into a logistical and bureaucratic maze at a time when they should be the vanguard of the economy. None of the Bills seems to have a timely solution, why then is the government in haste? One cannot but wonder if the mergers are pushed as a desperate measure to increase the assets and thereby reduce the government’s equity. The merging of the banks on the one hand along with the introduction of payment banks is going to irreversibly change the banking system in the country. These big banks would be the hailed global lenders and common man at the mercy of private payment banks. There is also the threat of many public banks that are not worthy of the merger being liquidated, resulting in massive job loss at a time of jobless growth! While NPAs needs to be resolved one need to be mindful of the impacts of the measures to fight NPAs.