5.80 lakh crore in bad loans: Let's pray for India's bleeding banks

The Rs 13 lakh-crore pile of bad loans of India’s public sector banks now amounts to more than the GDP of countries like New Zealand, Kenya, Oman and Uruguay. A new IMF report states Indian banks are in a poor state compared to the notoriously messy banking of China.

The financial results of major public sector banks (PSBs) show that out of 25, 15 banks have sunk in the red in the March quarter of FY 2016, though they registered profits during the same period last year. 

The awful state of PSBs has spoiled the Modi government's two-year celebration party.

Worries over Indian banks are getting global and being construed as a major failure of Modi government.

Bleeding banks not only hinder prospects of lower interest rates but also pull down the implementation of several government schemes that hinge on banking services. 

The data is scary. As per the March quarter data of 2015-16, the total pile of PSB bad loans has grown Rs 3.09 lakh crore to Rs 5.8 lakh crore in the last one year alone. In the quarter ending March 2016, PSBs' bad loans grew by Rs 1.5 lakh crore. 

As the gross non-performing assets (NPAs) of banks have cumulatively swollen to 1.5 times of the market value of PSU banks, for every Rs 100 invested in shares of public sector banks, investors carry the burden of Rs 150 as NPAs. At the end of FY16, 17 per cent of PSBs’ assets are stressed.

According to a report by Ambit Capital, if only a third of these assets is written off, that would imply that nearly 50 per cent of the shareholders’ equity in PSBs will be written off by the end of FY18.

In the absence of a credible government strategy to address the NPA issue, last year the Reserve Bank launched a campaign to clean the balance sheet of banks under which the banks had to set aside and reserve a certain sum against the bad loans (provisioning).

NPAs are declining, but out of 25 government banks, 15 have been caught in the whirlpool of losses due to aggressive provisioning.

The Swachta Mission of banking balance sheets is expected to continue for some more time, which means the banks have to lose more profits in the coming quarters.

Those trying to put Reserve Bank of India (RBI) governor Raghuram Rajan in the dock over expensive credit must cast a glance at the balance sheet of banks.

In May, the demand for credit fell below 10 per cent, which shows that banks are not getting new business. The deposit growth in the banking system slowed to a 50-year low of 9.7 per cent in FY 16.

NPA and provisioning is now eating into the capital base of banks. In fact, the reason why interest rates are higher is not because RBI's policy of inflation control but the poor state of banks that prevents them to transmit lower rates to public. 

The so-called banking reform programme Indradhanusha, that came last August, has failed to offer solace to banks reeling under distress. Indradhanusha offered homeopathy for banking ailments while the sector was waiting for radical reforms like creation of a bad bank to handle NPAs and aggressive divestment of PSU banks.

The capital base of banks is shrinking at such an alarming speed that the government will have to come forward to rescue them.

It might be a Hobson's choice for the government which runs the risk of breaching the fiscal deficit target, but given the inability of banks to raise capital by themselves, parking money in them from the budget becomes important to keep them viable for lending. If government doesn’t recapitalise PSBs, credit constraint will hurt growth in coming quarters.

Based on FY16-end numbers, the PSBs need $30 billion (36,000 cr rupees-equivalent to nearly 1.5 per cent of our GDP) equity infusion over FY17 and FY18.

Such a figure compares to the $4 billion budgeted by the finance minister for infusion into PSBs in FY17 and the $7 billion promised by the Finance Ministry for PSBs over FY17-19.

It is highly unlikely that the government will be able to find the resources required to recapitalise the ailing PSBs. It is beyond comprehension why the government chose to burden the banks with several populist missions at a time when they were going through their most difficult time after liberalisation.

Such (mis)use of banking was resorted to in the '70s and '80s when loan melas (loan fairs) were organised. Nearly half a dozen big bang schemes, launched over the last two years, hinge on big banks.

Mudra Bank, Start-up India and loan against gold are essentially the programmes made for low-cost credit distribution, while in Jan Dhan, insurance plans and direct benefit transfer services are implemented through banking network, thus adding to the cost of banking operations.

If the Modi schemes are not showing an impact on ground, the reason possibly could be that the financial condition of the banks doesn’t allow them to support such initiatives.

Economy requires low-cost credit and strong banking, not populist schemes. The government would do well to wake up from the party hangover of its second anniversary and set the ball rolling for strong banking reforms that it has been evading so far.

If the banking crisis deepens further, it will certainly dampen the hopes of growth revival that is expected to come in on good monsoon.

In addition, it may hurt the credibility of India’s financial system, which presently is better than that of several other countries.