Recapitalisation of NPA-burdened banks proves rewarding for the government

Due to government efforts, the NPAs of the banks have receded to 3.9 percent, and banks have also started making profits.

Indian banks were in a huge crisis some years ago and their non-performing assets (NPAs) were at their peak, endangering the sheer existence of these banks. The opposition parties have continuously accused the government of having written off loans worth lakhs of crores of rupees to benefit rich people. The government claims that most of the NPA loans were given under the previous UPA government and due diligence was not done before the disbursement of these loans to assess whether borrowers had the capacity to repay these loans or not. The menace of NPAs impacted the financial health of banks.

The credibility of the banks also declined and they were facing a crisis of existence. But thanks to the efforts made by the government, not only the NPAs of the banks have receded down to 3.9 percent, but the banks have also started making profits. With their health improving, these banks have also started giving the government dividends. Along with this, the market price of the stocks of these banks has also increased significantly. Now is the time to look back and understand what went wrong and where.

Due to bad loans of the banks, there was a huge reduction in their lending capacity. In such a situation, the banks were unable to give loans even to eligible borrowers. This started creating a big obstacle in the development of the country. Banks had to make huge provisions for these NPA loans, resulting in a sharp decline in their profitability. The deterioration in the financial health of the banks badly impacted both demand and investment in the economy. Not only the health of the banks, but even the health of the economy deteriorated and the country reached a major crisis. In view of the allegations and counter-allegations between the present central government and the opposition parties, it is imperative to analyse who is really responsible for the NPAs of the banks. This question is not only about politics, the answer to this question is also necessary so that such crises are not repeated in future.

Genesis Of The NPA Problem

It appears from the data that NPAs peaked in March 2018, when gross NPAs were recorded at 11.2 percent. Gross NPAs stood at 3.8 percent in March 2014. Thereafter, gross NPAs increased to 4.3 percent in March 2015, 7.5 percent in March 2016 and 9.3 percent in March 2017. Both gross and net NPAs did show a declining trend after March 2018. It has to be understood that any loan is considered to be an NPA when the principal and interest on such loan are not paid for 90 days. After the disbursement of any loan, it doesn’t become NPA instantaneously. There is a lag period in its becoming NPA, so if gross NPAs are maximum in March 2018, it means that the loans which have become NPAs were disbursed many years ago.

It is important to understand here that loans which have become NPAs were given during which period. Along with this, it is also appropriate to understand that during the period in which these loans were given, whether the banks gave excessive loans. Statistics show that the total outstanding loans of banks were Rs 71.76 lakh crore in the year 2004, which increased to Rs 628.21 lakh crore by March 2014, which is almost a 9-fold increase. If we see the next nine years of the NDA government under Prime Minister Narendra Modi, by March 2023, the total advances of the banks reached only Rs 1,419.80 lakh crore, which means only 2.26 times increase.

If seen in terms of annual growth rate, the annual growth in the quantum of outstanding loans was recorded at 24.22 percent during the UPA period and only 9.48 percent during the NDA period. Looking at the situation of NPAs, which occurred later, it seems that ‘loot of loans’ was happening under the UPA regime, otherwise, how could be a there 9-fold increase in outstanding loans, a large part of which later became NPAs?

Importantly, most of the loans that turned NPAs, were given before 2014. In the first three years of the UPA era, the amount and percentage of NPAs continued to decline. In the year 2004, NPAs were Rs 0.65 lakh crore, by 2007, they were reduced close to Rs.0.5 lakh crore. But by the year 2014, they had increased to Rs 2.63 lakh crore, i.e., more than five times increase in just seven years. This increase appears less as a percentage because loans were disbursed at a much faster rate during this period and the total volume of loans increased significantly. The amount of NPA loans increased almost as fast as the loans were disbursed, and by March 2018, NPA loans reached Rs 10.4 lakh crore. It can be understood that most of the loans turning NPAs were given before 2014.

Now the question arises as to why the banks failed to recover the loans which were given earlier. Going into the depth of this question, it is known that the securities mortgaged against most of these loans were not sufficient. Because of this, the banks had no chance to recover these loans by auctioning the securities. But before the wilful borrowers could be jailed after the legal process, they managed to flee abroad. The names of Vijay Mallya, Lalit Modi, Mehul Choksi and Nirav Modi are prominent among such fugitives.

Cleaning Up Balance Sheets

Thanks to the cleaning up of balance sheets of banks, with therecapitalisation of public sector banks and recovery of some loans, and the enactment of the Insolvency and Bankruptcy (IBC) Act, gross NPAs are expected to come down to just 3.9 per cent by March 2023. Today public sector banks are not only back on track, but their health has also improved. Recovering from losses, they are now making profits and also paying huge dividends to the government.

The government issued bonds for the recapitalisation of banks. It was the banks that subscribed to these bonds. The money so collected by the government reached the banks in the form of equity capital, as with this the government increased its share in the equity holdings of the banks, thereby increasing the capital reserves of the banks. Interestingly, there was no cash withdrawal from the budget during the year of recapitalisation. However, this was in addition to the public debt. As a result, the real impact on the budget took place only when the government paid interest to the banks on the securities held by them. The money so invested by banks in recapitalisation bonds is classified as an investment on which they receive interest.

Prior to this, between the years 1986 and 2001, the central government had recapitalised public sector banks with a total amount of Rs 20,446 crore. During this period also special bonds were issued and subscribed by banks themselves. These bonds were initially non-marketable but later they were converted into marketable bonds. This way no funds were given from the budget. This had an impact on the budget in the following years when public sector banks were paid interest on these bonds. But the important thing is that during this period, the banks also gave a dividend of Rs 15,222 crore to the central government.

That is, the impact of this recapitalisation on Revenue was minimal. The burden of interest that will fall on the central government on the basis of bonds issued at present is Rs 8,000 crore annually. Interestingly, after the health of the banks improved, now they have started paying huge dividends to the government. Public sector banks gave a dividend of Rs 8,718 crore to the central government in 2022 and Rs 13,800 crore in 2023. The central government is getting more dividends, than the burden on the budget due to recapitalisation.

Ashwani Mahajan is a professor at PGDAV College, University of Delhi, and the national co-convener of the Swadeshi Jagran Manch. Views are personal and do not represent the stand of this publication.