The only time you can repair a car or an aircraft, a hotel or a house is when it is not in operation.
The same applies for the banking industry which has been subject to massive banking frauds and rising non performing assets during the last five years. The banking reforms that started in 2015 in right earnest has achieved a lot. But a lot more needs to be done. This is probably the best time to complete the half done banking sector reforms as activity in the banking sector is at an all time low. The merger of the PSB’s is already under way. The restructuring of operations to increase efficiency and accountability in the PSB’s has however still not been done.
That process is complex and will take a lot of time, but it is the real repair work without which the PSB’s will never be able to perform or deliver. This is the right time for structural reforms, for not much is expected to happen anyway in the financial sector in the second quarter of the current year ending 30th September. The economy is limping back slowly as the country wide lockdown that started in the last quarter of 2019-20 gets partially lifted in bits and pieces. But normalcy is still is still far away. The industry is in distress and lending to both industry and retail sector are at an all time low. Though the Government has been trying to force credit disbursement to the industry during the last two years it has not succeeded as the industry debt is already at an all time high and the banks are definitely not interested in creating more NPA’s.
Why restructuring PSBs is more critical than credit disbursement.
Post lockdown, loans previously sanctioned by many banks have not been disbursed but instead parked with the RBI under the reverse repo rate. As a result from April nearly Rs 7 lakh crore (Rs 7 trillion) has been parked daily with the RBI, half of which were loans sanctioned by banks. When I asked a banker why this was happening, he said that “clients wanted to keep their exposure low during the lock down period as there have been no business transactions. It is under their specific instructions that we have not disbursed these sanctioned loans to our customers”. So whereas the Govt has taken measures to increase credit availability to the MSME as well as NBFC sector, it may not actually lead to more credit disbursement till the pandemic ends and the business environment improves. An analysis of RBI data shows that the private sector banks were able to increase credit flows by double digit while the PSBs have seen credit flow stagnancy during the last two years. This was largely due to faulty structuring of PSBs. The private sector banks had a vertical based structure which distributed the workload and also improved the accountability of bankers. The public sector banks were front end loaded with all responsibility apparently with the branch manager. So all the bad loans and NPA were attributed to the middle level branch managers in the PSBs while the big fish who masterminded the heists and the frauds got away scot free. So you would find a Chanda Kochhar or a Rana Kapoor who headed private banks behind bars but very few of the public sector head honchos being investigated, though it was where most of the frauds and the NPA’s took place.
After the implementation of the Asset Quality Review AQR in 2015 the maximum losses have been borne by SBI and PNB. This happened largely due to the policy of ever greening of loans and consequent money laundering and frauds that started post 2006. A senior banker at PNB told me “ how is it that the top brass of SBI and PNB like O.P. Bhatt and K.R. Kamath who where at the helm when the mega loan frauds were committed by Geetanjali Gems, Kingfisher Airlines, IL&FS, Essar Steel, Bhushan Power and Steel, DHFL and HDIL are not being investigated while the lower level working executives are all in jail. We who are the branch managers at the bank know that none of these frauds could have happened without active connivance of the top bosses”. Another banker said that “unless the bad apples of the PSBs are weeded out and they are restructured like private banks with distributed responsibility and checks and balances nothing can really improve. The frauds are continuing because the Government has been reluctant to take action against those at the helm who are actually permitting these frauds to grow by delaying reporting”.
Creating a Bad Bank is a Bad Idea.
The influential bankers lobby Indian Banking Association has suggested the creation of a public sector bad bank to dump the stressed assets. The idea of a bad bank would be to sell those stressed assets to buyers. The problem with creating such a bad bank is that there are no buyers of such assets from India in the international markets. There are over half a dozen large Asset Restructuring Companies who have been eyeing Indian assets since 2015, but nobody is really committing as they are watching the process evolve. “The banking reforms in India are only half done and though after the IBC Act we had thought that the resolution process would be swift, that has not happened. It appears that both the bankers are delaying the process of reporting and the judiciary is taking too long for review and disposal of cases. We are still hopeful that things will change and are watching the developments closely” said one large buyer of stressed assets.
The Government has not moved on the IBA proposal as they are aware that a PSB bad bank can only create a permanent graveyard of assets and not a vibrant junk yard where sales of stressed assets can take place. Yet it is reportedly trying to raise funds for recapitalisation of banks and may issue bonds in the near future to fund the shortfall. As per a recent Credit Suisse report the capital requirement for the Indian banking sector is $20 billion of which $13 billion would be needed by the PSBs. Despite the pandemic investors believe that the big banks in the private sector will be able to raise their funds without many issues. However the same may not be the case with public sector banks if they are individually allowed to fend for capital from the markets, due to lack of investor confidence. While new laws have been put in place after 2015 for stressed asset resolutions, fraud management has been very poor, for which both bankers and regulators need to be accountable. Both depositors and investors today have lower confidence in the banking sector than before. Unless that improves the bonds for recapitalising banks may receive lukewarm response.