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Those who got away

banks

“The banks’ woes continue not just because no worthy corporates are borrowing afresh, but moreso because there are new ones further emerging on the horizon”

 

The continuing stress and slowdown in the Indian economy, as also the deteriorating financial position of corporates, is further eroding the fortunes of the banking sector, already reeling under an unprecedented, unresolved NPA crisis. It is also aggravating the adversities of the NBFC sector, already doddering under the collapse for big lenders like ILFS, DHFL, RCap etc. The banks woes continue not just because no worthy corporates are borrowing afresh, but moreso because while the existing NPAs are not getting resolved, there are new ones further emerging on the horizon.

Even the much acclaimed IBC and the NCLT have proved to be a non starter, in the sense that they have turned out to be yet another law and just yet another court, where NPA resolution is indefinitely delayed due to procedures and mischievous/cold blooded litigation. Banks themselves are averse to going to the NCLT today, except where they want to liquidate the borrower, aware that they will get very little in the process.

Despite the huge fresh capital of lakhs of crores of rupees being pumped into banks by the government, their balance sheets are not yet healthy and rearing to make a fresh start, merely because the new capital has replenished just a part of what was lost in the bad loan losses, which  have exceeded over Rs.10 lakh crores.

A revival of fortune/operations of banks in India, is still miles and years away. A recent report of S&P on the state of our banking sector says that recovery in the banking sector will take a few years because of slow resolution of NPA cases, stress in the NBFC and corporate sectors and spurt in corporate defaults that offsets any recovery of past bad loans. It says that due to the slow economic growth, bank earnings will remain weak, and fresh capital infusion by the government will be enough only to compensate for the huge haircuts that banks take, when they settle bad loans.

This grim analysis is further confirmed by a report of Credit Suisse, which says that there will be a further surge in NPAs, since of the NPAs worth Rs.2.40 lac crores under resolution by banks at present, over 70% are of chronically stressed cases, with no possible solution on hand. It says that as against the present NPA level at 9.6% of bank loans, it will shoot upto 12% once these cases fail and go into liquidation.

Credit Suisse also cites the slowdown in the Indian economy, poor offtake in fresh credit and a surge in corporate defaults as factors that will aggravate India’s banking crisis. It pertinently says that 42% of these defaulter companies do not even have enough profits, such as to even pay interest on loans, their principal repayment being a far cry away.

The fact is that apart from setting up an ineffective/struggling IBC and a humongous recapitalisation of India’s bankrupt banks, as also regulatory tinkering here and there, India never did put in a complete package of efforts to resolve the extensive NPA crisis, which has crippled the Indian economy. This crisis has occurred primarily due to a political and bureaucratic meddling in the functioning of banks, such that fraudulent and reckless giant loans were given during the UPA 1 and 2, driven by a criminal and corrupt nexus, between the neta-babu-bania. That is how shocking huge loans were given to the likes of Videocon, Sterling Biotech, ILFS, DHFL, Alok industries, Jet Airways, Nirav Modi, Bhushan Steel and so many others.

The reality is that all these criminal loans are mired in investigation, court processes and litigation, such that these corrupt criminal elements who have cheated/looted Indian banks have not really been punished and tamed appropriately so far. That means that this feature of influenced loans has not been eliminated from our banking system and it will certainly return to haunt the system in a much bigger way in future. To us these delinquents have largely gone away scot free and will return again on some future day.

In the meanwhile in a bid to revive India’s moribund banking system the government has been pumping in fresh capital into banks. The FM has also assured bankers that agencies like the CBI, CVC and CAG will not hound them where genuine lending decisions have gone bad. That is not going to be enough to energise Indian banks.  Even if the government gives them lacs of crores of additional capital, and revamps their management their situation will now improve only in tandem with improvement in the Indian economy, improvement in corporate sales and profits and a pick up in consumer demand. The more that is delayed, the more will corporate failures emerge, only adding to the woes of India’s struggling banks.

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