July 10, 2016

Bad Loans of Banks

THE burden of bad loans of the banks has worsened in the last six months according to the latest Financial Stability Report of the Reserve Bank of India. According to the report, the gross non-performing assets (NAPs) ratio has risen sharply from 5.1 percent last September to 7.6 percent in March this year. The share of large borrowers of gross bad loans increased to 86.4 percent and their share of total loans is 58 percent in March 2016. According to one estimate, corporate debt worth Rs 6.7 lakh crore is facing the risk of default. The problem of bad loans, or, non-performing assets has come to the fore after the Reserve Bank of India asked banks to undergo asset quality reviews and to clean up their balance sheets which resulted in the revelation of more bad loans which were not being reported. This plight of the banking sector is a result of the neoliberal push by the UPA-II government and the present Modi government to extend lending on generous terms to the private companies in infrastructure. Given the government’s adherence to fiscal responsibility, in the name of public-private partnership in infrastructure projects, public sector banks were encouraged to lend to the infrastructure sectors such as power generation, power distribution, ports and roads. The promotion of crony capitalism also meant that public sector banks were indiscriminate in lending to favoured big corporates. The failure of the private investment-led infrastructure development is now evident in the huge amount of NPAs owed by the big infrastructure companies like ESSAR, Jaypee, GMR, Reliance ADAG, Adani, Lanco and others. The response of the government was to get the public sector banks to write off loans of the chronic defaulters. Between 2013 and 2015, banks wrote off loans worth Rs 1.14 lakh crore. According to the finance ministry data, wilful defaulters of public sector banks owe Rs. 66,190 crores at the end of December 2015. Recently, the Reserve Bank of India, under pressure, decided to publish the names of such willful defaulters. But the main issue is what penal measures will be taken to recover these loans through takeover and sale of the assets of these defaulters. So far, if an entity is declared to be a willful defaulter, then credit channels are blocked and no additional lending facility is available from any bank or institution. The government and the RBI must give a direction to ensure that the big corporates who are the main borrowers repay the loans given by the public sector banks within a reasonable timeframe. The loss of revenue sustained by the banks due to bad loans are transferred as an additional burden to the retail loan sector. It is the small loan takers for housing, education and small enterprises who suffer the consequences. The whole direction of the banking sector under the neoliberal regime needs to be reviewed. The bulk of the agricultural credit does not go to farmers, but to agri-business and non-agricultural purposes; priority sector lending has been subverted. The Modi government is giving a renewed push for privatisation. A push for privatisation in banking will only further worsen the situation. The RBI’s decision to issue licenses for private banks including those sponsored by corporates was wholly misplaced. The inadequate allocations made for recapitalisation of the public sector banks coupled with the government’s stand of raising capital through disinvestment of shares of the public sector banks, would lead to privatisation of the public banking system. What is required is provision for adequate recapitalisation of public sector banks. The government’s promise to provide capital support of Rs 700 billion till 2019 is inadequate. The government needs to keep aside neoliberal fiscal considerations in implementing the revised capitalisation plan. It is also essential that the government stop directing the public sector banks to finance infrastructure projects. There has to be an alternative institutional mechanism for such financing. (July 06, 2016)