Challenging times for public sector banks

The finces of public sector banks (PSBs) in the country are in a mess due to bad debts. Willful defaulters are taking the banking system for a ride, with an irate Supreme Court now asking the Reserve Bank to furnish a list of the big defaulters. An alarming picture of PSBs gasping under a mountain of non-performing assets (NPAs) is beginning to emerge, after the RBI cracked the whip last year and ordered banks to clean up their books. Leading PSBs including Bank of Baroda, Bank of India and IDBI Bank have reported highest ever quarterly losses totaling over Rs 12,000 crore in the October-December period last year. The gross NPAs of public sector banks are a little under a staggering Rs 4 lakh crore, which is 90 percent of the entire banking system’s NPA burden. In terms of net NPAs, the share is higher at 92 percent. The two bigger PSBs Bank of Baroda and Bank of India have net NPAs 5.67 percent and 5.25 percent respectively. Smaller PSBs include the Indian Overseas Bank with 8.32 percent, De Bank with 6.68 percent, UCO Bank with 6.51 percent, UBI with 5.91 percent and Central Bank with 5.3 percent net NPA burdens. The country’s largest lender State Bank’s net NPA stands at Rs 40,249 crore, a debt burden that can sink any private sector bank not enjoying the cushion of the government’s tacit 100 percent sovereign guarantee to the SBI. More bad news is likely in the next quarter, with the RBI having asked banks to reveal the real picture of their bad as well as stressed assets. While bad loans will not be recovered and are worthless assets to the creditor, stressed loans are those in which borrowers have not repaid the principal or the interest. It is estimated that at over Rs 7 lakh crore, the stressed loan burden will be nearly double of bad loans.

As for profits, PSBs are mostly in the red, having collectively lost Rs 10,727 crore, with State Bank (SBI) and Punjab tiol Bank (PNB) showing sharp downturn in profits. In sharp contrast, private sector banks reported profits aggregating to around Rs 11,218 crore. Recently, sections of the media reported an RTI response from the RBI which revealed a more than three-fold jump in bad loans — up from Rs 15,551 crore for the fiscal ending in March 2012 to Rs 52,542 crore by the end of March 2015. Meanwhile, as much as Rs 1,14,182 crore bad loans were waived off between 2013 and 2015, which is half of over Rs 2.11 lakh crore waived from 2004 onwards. Taking suo motu cognizance of such reports, the Supreme Court asked why public fincial institutions are lending money despite getting no returns. Terming it a ‘big fraud’, the apex court directed the RBI to keep a close watch on such banks and submit a list of all defaulters who owe over Rs 500 crore to banks while leading ‘lavish lifestyle’. As on December last year, a list of 2,470 willful defaulters has been drawn up. Of these, barely 2 percent or 48 borrowers have taken nearly half the loans banks are now classifying as ‘doubtful, loss-making or sub-standard’ advances. Most of these borrowers are companies active in the infrastructure sector, followed by steel, power, telecom, real estate and textiles.

The government last year had announced the ‘Indradhanush’ plan to infuse Rs 70,000 crore in PSBs over four years, while these banks will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirements in line with Basel III global risk norms. The intertiol rating agency Moody’s has now warned that if Fince minister Arun Jaitley does not revise upwards the capital infusion plan for PSBs in his upcoming budget, their credit profiles will worsen further. Promising to empower banks to recover non-performing assets and bring about a bankruptcy law soon, Jaitley has also said that the NPA problem ‘should not be exaggerated’. However, the banking sector is being called upon to take greater responsibility in the Prime Minister’s vision of fincial inclusion of the poor in the banking system, ratiolizing subsidies by paying cash directly into beneficiary accounts, supporting startups and ‘Make in India’. RBI Governor Raghuram Rajan’s call for continuing the clean-up exercise to ensure stronger balance-sheets for banks is therefore an urgently needed exercise. Or else, several of the 22 public sector banks in the country will have to face tough if not unpleasant options like professiolizing their magement, going for merger, privatization or outright closure.