Bad loans: Mallya not the only one giving banks sleepless nights
For the past week the 9,000 crore rupee loss that Vijay Mallya has caused the banking system has dominated headlines and mind space.
A part of this has been paid back by way of pledged shares. So the net principle loss to banks may be closer to Rs 5000-6000 crores. It's surprising that this amount is causing so much consternation.
Almost every business journalist knows that Mallya will not rank even among the top 25 biggest defaulters. The list of top non performing loans or NPAs is still a closely guarded secret. But one can guage the most stressed assets. Here's the list of some of the largest borrowers, many of whose group companies are known to be loss making.
LARGE STRESSED BORROWERS
GROSS BORROWING -FY15
Essar Group 1,01,464
GMR Group 47,976
GVK Group 33,933
Jaypee Group 76,180
Lanco Group 47,102
Reliance ADAG 1,24,956
Videocon Group 45,405
Most of these borrower-groups comprise companies whose earnings are way lower than their annual interest outgo. Here's a list of corporate borrowers whose loans are larger than Mallya's Rs 9,000 crore and whose earnings are less than their interest dues for the last 1-3 years:
Many of these loans may not be repaid. Indeed even now many of them have been kept outside the non-performing asset (NPA) list only because banks have been giving them working capital loans large enough to cover the monthly interest repayment. That may explain why banks' exposure to some of these companies has been rising steadily for the past five years or more despite there being no capex.
The only reason why Mallya has become the poster boy of defaulters is probably because of his flamboyant life style. Much larger defaulters have escaped the public eye by being low key. Take for instance the Essar group. Essar group's Essar Oil and Essar Steel came for corporate debt restructuring (or CDR) first in 2003-04. The group blamed the Essar Oil CDR on a cyclone in Vadinar and the first Essar Steel loan restructuring on the global slowdown from 1998-2003. Already by then the group companies had defaulted on a bunch of debentures and foreign floating rate notes.
In less than ten years after the first corporate debt restructuring, Essar Steel once again had trouble repaying its loans. Its debt was downgraded to default status by rating agencies in 2013. Banks continued to look at ways of restructuring the company's loans through the 5/25 route and called it an NPA only when the RBI forced them to recognize stressed loans as NPAs at its recent sector-wide asset quality review. Short point the loss caused to the financial system by some of these large groups is much higher than that caused by Mallya.
Besides these, are the government owned defaulters: Dabhol, discoms, Air-India. This is along list that will put Mallya to shame.
It's true that the prime cause of the current large loan defaults is the global financial crisis of 2008 and the inability of global demand to recover thereafter. The recent plunge in commodity prices has made matters worse. Bad loans is thus a global phenomenon. But a few features stand out in the Indian context:
1. In most large loans, Indian banks have much more at stake in the projects than the promoters. Which explains why banks are keener to save the project than the promoter is to bring matching funds.
2. One big reason for this penchant to save previous loans is the legal system. With no recourse to quickly resolve a bad loan or recover their money, banks are forced to evergreen the loan ie give more loans (in the guise of working capital) only so that old loans are serviced.
3. Banks appear to have given loans based on the group's strength rather than the balance sheet of the borrowing company.
4. The political ownership of the banks also blurs their commercial responsibilities. Bankers recall that in early 2009 there was practically weekly hounding of bankers by the ministries asking them to clear more loans. The UPA was facing its re-election and there was also a general feeling that while the West had problems, India, along with the BRICS countries was set for 10 percent growth. Caution was scarce.
5. The political connections of the borrowers also made it difficult for government owned banks to refuse loans as well as to recover them.
It is clear that while private banks also have large bad loans, public sector banks have come out looking much worse. If both sets of banks have the same regulator and regulations, clearly the fault lies with the ownership.
The government as owner is not subject to market discipline. Government doesn't bother if the share prices of its companies crash, unlike private bank owners. For the same reason government banks are also willing to lend below breakeven rates, just as Air India sometimes flies at cut throat rates. Governance clearly is the huge difference between private and public banks.
With such pathetic balance sheets it wont be possible to bring down government stake below 50 percent in public sector banks in the near term. But when the dust settles, this is the first reform that needs to be effected.