If 2014 was about the deteriorating health of the Indian banks, especially when it comes to bad loans, 2015 was marked by a series of steps taken to cure the ailment.
State-run banks make up half the list of the top 10 wealth destroyers of 2015 in the BSE 200 bucket and it's all because of a problem that reared its head in 2014 -- bad loans, which have leeched away at bank profitability. Total stressed assets in the system rose to 11.1 percent by March 2015 compared to 10 percent a year ago.
The problem grew worse as the year progressed and this prompted every stakeholder to try and come up with a solution.
First, the government. It's response came in the form of "Indradhanush" -- a seven-point agenda for banking sector reforms.
These included governance reforms like revamping appointment procedures, splitting the Chairman and MD positions, empowering MDs and stopping politicised lending.
Also the government has promised a whopping Rs 70,000 crore to public banks to help them clean up their balance sheets and meet capital requirements.
Jayant Sinha, MoS, Finance, says " Our thinking is that we have to provide the tools & resources to the banks to help them deal with imp challenges of the future and stay within the challenges we have right now."
To ease the pressure of impaired infrastructure assets, Ministries like Steel, Power and roads pitched in. The power ministry arranged for gas to gas-based plants at a price that allows at least partial viability, the rail ministry helped to revive the Dabhol power plant by offering to buy its expensive power, while the roads ministry .providing more viability gap funding to projects and allowed deferring equity contribution of promoters. Lifting of mining bans in several states also helped.
The Reserve Bank of India on its part empowered banks. The 5/25 rule allows banks to roll over loans of long gestation projects into longer term loans. The Strategic Debt Restructuring Scheme allows banks to convert their loan into equity, acquire majority control and force out a bad owner... all the while keeping their loans in the "standard" category.
Raghuram Rajan, Governor, RBI, said, "First let us fix the governance, so that administration becomes easier in the banks. Second, let us enhance bank powers so that they can actually take some of the actions that are needed to take. Third, let them recognise the problems, bring the stakeholders to table and deal with that. And fourth, there should be enough capital to bolster their balance sheets in case they have to recognise provisions while doing all this."
Pressured by banks, some indebted corporate borrowers have sold healthy assets to bring down debt. Big deals were struck in the cement, roads, and shipping sectors as companies groped for strategic investors or outright sales.
But life is not easier for the bankers.
The RBI is now moving to ensure that schemes like the 5/25 and the strategic debt restructuring are not used to hide bad assets. Also the governor has set a deadline of March 2017 by when he expects banks to clean up their balance sheets seems set in stone.
Will all these steps stop the faster pile up of loans? Will they help tackle legacy issues? It may be too early to say things have changed but after a prolonged period of pain, 2015 has definitely brought some relief to this sector. Not because the NPA problem has vanished, but because the process of identifying the problem has begun and that is almost half the battle won.
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