It's not quite apocalypse for banks

Trade

• Watchlist
• Portfolio
• Message
• Set Alert

 

 

Choose Stock Exchange: BSE LIVE NSE LIVE

26 Aug, 2025 12:21

Volume

Todays L/H

More

×

It is the season for apocalyptic reports about PSU banks in particular and the Indian banking sector in general. Doing the numbers from all the rating agencies and brokerages it appears that total stressed loans whose borrowers have not been paying, cannot pay or will not pay interest on time is probably 15 percent of total assets, though banks as of September 2015 had declared only 5.1 percent of their assets as gross non performing assets (or default loans).But this once it appears the Reserve Bank of India (RBI) is fully seized of the contours of the problem. Since mid 2014, the RBI has put in a new software called CRILC or (Central Respository of Information for Large Credits). Banks report details of all their accounts to this repository, where the accounts are identified by their PAN numbers. The RBI thus has a master list of borrowings of all the big borrowers and it has been sharing these with banks. Penalties have been imposed on banks who fall short on reporting accounts that are falling back on repayments. In its annual inspection of bank books this time, the RBI was empowered to use a different route. Instead of a bank-wise inspection of asset quality it called for account wise inspection across the banking system. It stands to reason that the central bank now knows the numbers better than anyone and it has shared these numbers regularly with bankers.It is on the strength of this information that the regulator has now told banks to mark as non performing Assets (NPAs) all accounts that show stress: accounts which have defaulted with one bank but not another, promoters who have not brought their share of equity in restructured cases, or who have brought their share of the equity by borrowing from other entities, in short any account where the flow of monies from the asset is inadequate to service the loan.These strict rules from the regulator come at a time when bank shares world over are being pulverized because of the steep decline in commodities and the inevitable expectation that banks will see more corporate defaults. The selling in Indian bank shares has therefore become even more frenzied, accompanied as it is by more and more apocalyptic reports from brokerages.However, my detailed discussion with public sector bankers and RBI officials gives me a feeling that the situation while grim is controllable. Senior public sector bankers told me that if they have to provide for all their stress assets by March 2017, they have the means. Private banks, if anything are even better capitalized. The quiet confidence of senior RBI officials is also reassuring. They maintain that the government has been taken on board in this clean-up exercise and they have been assured that whatever is needed by way of capital will be provided. If that is the case, then this near term pain that all banks are going through is worth enduring. It is not apocalyptic. This too shall pass.There is an argument one often hears from bankers, India Inc and even columnists: that this is the wrong time to order a clean up since growth worldwide is at its worst. This was same the dangerous argument that backed the RBI's 2009 regulation allowing banks to do a one-time-restructuring of bad accounts. The argument was that this is a "passing phase". As it turned out, banks and corporates were in better shape in 2009, and ought not have restructured stressed assets. They should have called the stressed assets NPAs and arranged for provisions. This would at least have prevented them from throwing good money after bad. Who knows, in 2018, this may still be the good old days. So let banks provide for all suspected bad accounts and then move on to lend to newer, healthier companies.While bankers must bear the pain of their past mistakes, there is one side of the transaction which hasn’t really borne the pain, the promoter. Even today companies that are being taken over by banks through conversion of loans to equity under strategic debt restructuring are relatively small fry like Jyoti Structures or Electrosteel. What about the Essars and Lancos and GMRs. Essar Steel is a case in point. The company defaulted on its foreign bond holders in 1999, defaulted on its bankers in 2003 when its loan was restructured and was on the verge of default again this year when bankers once again gave it a lifeline through a 5-25 loan refinance.Aren't three defaults enough to require a change in management? Then why have bankrs refinanced Essar Steel’s loan under the 5-25 scheme and not a strategic debt restructure that will remove the owners? In the first place, how can a 20 year old plant be given loan for a further 20 or 25 years. Also, in the past five years the promoters, the Ruias have made decent money first by selling their stake in Vodafone at solid 5 billion dollars. They are recently in the money again thanks to the sale of Essar Oil to Roseneft. Why aren’t promoters bearing a larger share of Essar Steel’s problems, but leaving it to the banks to bring more funds.?While the move to clean up banks' balancesheets is welcome, it needs to be accompanied by a move to make some of the promoters pay as well.