Banking Central | The year-end ruminations of a pessimist banker

The phone rang. It was this senior Mumbai banker whom I have known for years and is a well-known personality in the financial services industry-- someone known to speak his heart always. What began as a routine call to discuss the latest developments at a recently-rescued bank soon turned out to be a long chat on broader banking sector issues.

The conversation went largely on these lines:

Me: So, 2020 is coming to an end. Feeling relieved?

Banker: Well, I was never unhappy to be very honest. Thankfully, we never felt any major crisis in business despite what you see in the news.

Me: That is surprising, right?. Every banker I have interacted with over the past seven months has said business became tough.

Banker: That’s true even in my bank also. What I meant is since the entire industry is impacted in the same manner, we never fell behind the competition. We look at it in relative terms, you see.

Me: But your business also suffered?

Banker: Yes. But, we continued to lend to big clients. We were not lending to smaller ones anyway. People think everything is due to Covid. But, the situation was the same even before, right?. Actually, Covid helped banks to get plenty of liquidity and key regulatory relaxations on asset classification--thanks to RBI.

Me: What about bad loans. Aren't you worried?

Banker: Why should I worry? Covid-19 lockdown began in March and the RBI allowed moratorium in the same month. Any likely NPAs escaped the NPA tag due to the moratorium cover.

Me: But moratorium ended in August

Banker: Technically yes. But, not in practical sense. The Supreme Court has effectively extended the moratorium by banning banks from tagging fresh NPA accounts. So, the Supreme Court has started from the point the RBI stopped.

Me: But, the SC’s order is an interim directive, right?. It has to end one day

Banker: Correct. One day banks will have to start NPA classification again but then the one-time loan restructuring (OTR) begins. But, this means, two more years of loan moratorium.

Me: So nothing is going to come out for next two years. Is that what you saying?

Banker: Essentially, yes.

Me: Hmm…But…isn’t this sort of covering up the actual stress in the banking system? We just finished a major NPA clean up exercise. What if the bet goes wrong?

Banker: The bet is that economy will recover by then and everything will be back on track. If it doesn’t happen, we may see a significant spike in NPAs after 2022

Me: But, banks have been asked to provide for loans going under recast and the OTR is being done in much more orderly manner this time.

Banker: True. But, the big assumption behind all these temporary measures is the return of the banking sector to normalcy. How far that will happen one needs to see.”

Me: What about all those big accounts like the Mallyas, Nirav Modis and Choksis..any chance of getting money back?

Banker: Well, frankly…I don’t expect anything meaningful to happen in any of these cases. Big corporate defaulters always have a way out unlike retail defaulters.

Me: Do you think Mallya will be extradited to India in 2021?

Banker: Not really. Going by the UK’s record, it is not going to happen. Now, if by some miracle even if it happens, banks aren’t getting any money. The hole is too deep by now…

Me: Too many bank/NBFC rescues---DHFL, IL&FS, YES and LVB. What do you think?

Banker: It’s clear. Any bank is too big to fail in India. This is both good and bad.

Me: Meaning?

Banker: So, the good news is all these failed institutions were rescued overnight, saving depositors. But, the bad news is now every company know that there is nothing called a dead end. The state will rescue any bank no matter whatever kind of fraud was committed by management/ promoters.

Me: You see, all this happened under the watch of RBI. What does it mean?

Banker: It means either the regulator didn’t have an idea of any of these or was simply incompetent to monitor large institutions.

Me: Do you mean to say that RBI failed in identifying early crisis signals at these companies?

Banker: Yes, the regulator needs to be more accountable. All this happened under its watch. Any other country, the banking regulator would have had to answer for the continuous lapses.

Me: What about banks? Do you trust the NPA guidance of banks?

Banker: Well, no banker will tell you the whole truth, on record”

Me: But, you aren’t on record now

Banker: I can tell you most of the NPA guidance you see in bank conferences is a significant underestimate of the actual situation. The actual figures could be bigger. Also, banks have tried to minimize the NPA figures through last minute adjustments.

Me: What do you think will happen in 2021?

Banker: Why do you think 2021 will be different? Ground realities remain same. What can you expect in a sharply slowing economy?

Me: Heard vaccines are coming…

Banker: But, we didn’t have a booming economy even before Covid.. Don’t forget. Where is the demand? Where are private investments, consumer confidence…Covid is only one factor

Me: You almost sound like a pessimist

Banker: Well, I’m a realist.

As the conversation ended, I tried to recall instances when this banker was wrong about things he had said during our “off-record” chats over the past many years. I couldn't recall many.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)