Paying for bad loans

After merging State Bank with five of its associate banks and Bharatiya Mahila Bank in April last year, is the Narendra Modi government now gearing up for another mega merger of public sector banks (PSBs)? Speculation is rife that four such banks, namely Bank of Baroda, IDBI Bank, Oriental Bank and Central Bank may likely be merged soon. In the 2017-18 financial year, these four banks reported combined losses to the tune of Rs 21,646.38 crore. The problem is the same — bad loans fouling up their books. While the government is keeping its cards close to chest, the understanding is that only big players will survive in the banking sector, considering the way things are going. If the merger of these four PSBs does come through, it would create the country’s second largest bank after State Bank. Supposedly, this bigger entity will be better able to dispose of bad assets, while undertaking cost-cutting exercises like reducing overheads and shutting down unprofitable branches. What is more, the government may also reduce its stake in any such PSB, which would open the door to private equity investors. How it all pans out remains to be seen, keeping in mind that all these banks have their own ‘operating cultures’, unlike the associate banks of SBI merged with the parent entity.

Clearly though, wrenching changes are in the offing for the country’s banking sector, dominated as it is by some 21 public sector banks. The recent 2-day countrywide strike by bank unions was primarily over demand for pay hike and better service conditions. With the next wage revision settlement due by November this year, the government’s offer of 2 percent pay hike and its perceived differentiation between lower and upper grade officials — did not go down well with the unions at all. There has been much angst among bank employees over the government’s reported stand that it cannot pay them more because their banks are not making enough profit. This is hotly contested by the unions, which claim that PSBs are in fact making operating profits consistently, but have to set aside larger sums to cover bad loans, thereby hobbling them with net losses. The figures for the last 10 financial years are in the range of total operating profit at Rs 9.2 lakh crore, of which Rs 6.6 lakh crore has been wiped off for bad loans; so to penalise bank workers with lower wages on account of bad loans is unfair, complain unions. The banking sector presently has bad loans totalling Rs 9.8 lakh crore, of which 88 percent is accounted for by PSBs. The bulk of bad loans was taken by industry (Rs 6,09,222 crore), followed by services (Rs 1,10,520 crore) and agriculture sectors (Rs 69,600 crore). Within industry, the major spheres responsible for NPA increase are power, infrastructure & construction, textiles, iron & steel and telecom. The true picture is beginning to emerge because the Reserve Bank has been pushing banks to clean up balance sheets, withdrawing all schemes under which NPAs could be hidden, and insisting on the Insolvency and Bankruptcy Code.

For long, the government has been blamed for this bad loan problem of banks. Political interference in the business of lending, along with mega loan waivers by governments, have thrown bank accounting books out of kilter. Wilful defaulters have been allowed to go scot free, and on many occasions the government is coy about even naming them. Banks have also been recklessly used by governments as an extension of treasury. Now that the bad loan problem has gotten out of hand, the Finance Ministry is cobbling together bailout packages; innovative strategies are being mulled to deal with NPAs, like the one reportedly to protect a bank’s operating profits from erosion and use it as a basis for lending. It is a fact that lending has suffered as banks have gotten more conservative, with the RBI demanding prompt corrective action on NPAs. The fallout has been low credit-to-deposit ratio (CDR) of banks, with Assam and indeed the entire Northeast region suffering for it. Bank loans in the State have not kept pace with rising deposits; as per Assam Economic Survey figures for 2017-18, the CDR of commercial banks in the State went down to 39.9 percent in 2017, while the national average was 73.7 percent. There are however persistent grounds for suspicion that banks in Assam have trotted out the NPA burden glibly and far too often to deny lending, particularly to small businesses in backward districts and rural areas. Entrepreneurs planning start-ups face a bleak scenario, and the State government has had little success in nudging banks to give them credit support. The power-be in Dispur will need to take a firmer line, while at the same time ensuring that a proper culture is built up in the State to honour bank loan commitments.