Banks Sitting on Bad Debt Volcano

By Ramesh Raja
In Cover Story
April 1, 2015
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bank-debtsState Bank of India, the country’s largest lender, recently took control of Kingfisher House, a prime property owned by Vijay Mallya’s Kingfisher Airlines in Mumbai, in an attempt to recover part of the money the airline owes to the bank. SBI claimed the property, spread over 17,000 square feet and which houses some of Kingfisher’s key offices, after securing a favourable ruling from a Mumbai court. Kingfisher owes over Rs 7,000 crore to a consortium of banks, including SBI. To be sure, the value of the Kingfisher House would constitute only a small fraction of Rs 2,000 crore the grounded airline owes to SBI.

This is perhaps the first time in recent years that any public sector bank has taken such a tough step against a big, influential business house. Also noteworthy is the fact a government bank could attach one of the prime properties of a prominent business
tycoon and a politician, braving any interference – political or otherwise. SBI’s action, in that sense, could inspire lenders to take on wily promoters and cronies, who owe several billions to banks and have delayed payments for years.

Although the over USD 1.8 trillion Indian banking system has got the potential to be the fifth largest banking industry in the world by 2020 and total asset size is poised to kiss USD 28.5 trillion by 2025, Indian banks are sitting on a bad debt pile that is close to Rs 3 lakh crore, a significant amount of which is an outcome of loans given to mid-sized and large companies. The number of wilful defaulters, or borrowers who wouldn’t pay back even if they have the capacity to do so, has been on the rise in the recent years, prompting banks to start acting tough. Typically, in such cases a wilful defaulter diverts bank money to fund other purposes.

It is clear that when loans taken are not repaid, much of the funds go out of the financial system and the cycle of lending-repaying-borrowing is broken. As a result, banks have to borrow to repay depositors and creditors and then banks become shy to lend further thus choking the entire system. It then negatively impacts the economic growth and development as fresh money flow to the wealth creation endeavors stops. Non Performing Assets and Bad Loans are thus quite terrible from the economic point of view.

Kingfisher is just one of many companies that have been categorised as wilful defaulters by other staterun banks. Others include Winsome Diamonds and Jewellery, Zoom Developers, Koutons Retail and Mumbai-based Tayal Group-promoted KSL & Industries. Winsome Diamonds owes Rs 6,500 crore to a clutch of banks including Axis Bank, Canara Bank, Bank of India and Bank of Maharashtra. About Rs 900 crore is balance to PNB going by the information from the bank. Zoom Developers, which owes about Rs 2,600 crore to banks, has an outstanding debt of Rs 410 crore to the Mumbai-branch of PNB, while Koutons owes Rs 88 crore. The Mumbai-based Tayal group, the former promoters of the erstwhile Bank of Rajasthan, which has interests in textile to real estate, still needs to pay around Rs 2,500 crore to various banks.

Kingfisher House in Mumbai which has been taken over by SBI

Kingfisher House in Mumbai which has been taken over by SBI

Even as SBI’s ‘Kingfisher act’ would set an example, the involvement of influential politicians and industrialists, as well as legal interventions have indeed contributed to the rise in bad loan levels of banks. Mallya’s Kingfisher is definitely a case in point. Even though Kolkata-based United Bank of India had tagged Kingfisher a wilful defaulter late last year, Mallya secured a stay from the Kolkata High Court on technical grounds. The recovery process, thus, often gets delayed for years and by the time banks manage to lay hands on the collateral, the value of the asset would deteriorate sharply.

As per bankers, one reason why the state-run lenders have turned more aggressive in taking stringent action against the defaulters is a strong push from the Reserve Bank of India for faster recovery of bad loans. The RBI, in January last year, had come up with a roadmap on early recognition of bad assets, which incentivised banks making efforts for quick recovery and penalized those that delayed action. Later, RBI Governor Raghuram Rajan came down heavily on bad borrowers, saying they needed to be seen as freeloaders rather than being celebrated as industry captains.

It may be noted that public sector banks are more affected than their private counterparts by bad loans or the menace of non-performing assets  (NPAs). One of the major reasons in this regard is that state-run banks have relatively high exposure to
sectors like telecom, power, airlines and agriculture which have performed badly over the last few years. Private sector banks, on the other hand, are more exposed to the retail sector with close to 35-50 per cent exposure whereas PSBs have just around 20 per cent retail exposure. The sectors that contributed significantly to the stressed advances are infrastructure, iron and steel, textiles, mining and aviation services. All of these sectors had received help during 2008-09 to avoid financial crisis in India.

Hence, India’s state-run lenders, over the last few years, have steadily lost market share to rivals in the private sector due to mismanagement, careless lending and corruption. These banks are currently capital constrained, neck-deep in bad loans and lack autonomy in operations.

Besides, hit by sluggish domestic growth and continued uncertainty in global markets that has leading to a drop in export of various products, including textiles, engineering goods, leather and gems & jewelry, the bad debts of public sector banks have surged to a 10-year high. Bad debts for all public sector banks reached 5.64 per cent of their total advances as of December 2014, the highest level since 2004-05, when they stood at 5.73 per cent. These numbers were disclosed in an agenda note for a meeting Finance Minister Arun Jaitley had with the heads of public sector banks and financial institutions last month. During the last few quarters, there has been a continuous rise in bad debts, making the situation alarming. NPAs were 4.72 per cent of total advances at the end of March 2014, and rose to 5.29 per cent by September-end before surging in the December quarter. According to the agenda note, “PSBs continue to be under stress on account of their past lending.”

According to reports quoting Finance Ministry officials, both PSBs and the Centre can be expected to continue with measures to improve asset quality. Banks are also expected to move to improve risk management and asset quality. At the same time, the
Centre is in the process of establishing six new debt recovery tribunals (DRTs) to speed up recovery of bad loans.

Since the stalled projects have been adding to the NPAs of the banking sector, the government feels that clearing them will help in improving the loan situation of public sector banks. Finance Minister Arun Jaitley recently assured bank chiefs that the government is taking a number of measures to revive the Rs 8 lakh crore of stalled projects, most of which are languishing in the infrastructure sector. They said that resolution of the stalled projects will help public sector banks improve their asset quality. “During the period – April 2014 to January 2015 – public sector banks received 88 new projects proposals with a total investment of Rs 1.41 lakh crore. These are in various stages of appraisal, sanction and stage-wise disbursements,” said the finance ministry in a release on its website.

Even the recent Economic Survey had pointed out that unfavourable market conditions and delayed investments in last few years had resulted into an “alarmingly high rate” of increase in stalled projects,  which, as of December-end, stood at a staggering Rs 8.8 lakh crore. On the bad loan issue, the banking sector data revealed that top 10 borrowers accounted for Rs 28,152 crore of nonperforming assets of public sector banks.

Meanwhile, the recently submitted budget for the year 2015-16 has been a big disappointment for public sector banks. These banks need capital infusion of about Rs 2.50 lakh crore till 2018; however the budget has allocated a meagre sum of just about Rs 9,550 crores towards this. The government should hasten the merger activity of banks; however there is also no visible movement in this regard.

Needless to say, the public sector banks have a significant role to play in building our nation, as they control about 75 per cent of the total banking business in the country. Hence, there is clear cut danger sign and the first minimum step government can take is to totally stop politically influenced lending. Also, the government should give banks free hand in recovering loans and reduce bad debts from corporate and strictly avoid putting any pressure on banks to go slow, due to lobbying by corporates.

Timely and effective recovery of bad loans is very important. This happens to be the reason that debt recovery tribunals were brought into practice to help financial institutions recover their dues fast without being subject to the long procedures of usual civil courts. The amount recovered from cases decided in 2013-14 under DRTs was only 13 per cent of the amount at stake i.e. only Rs 30,950 crore were recovered from outstanding value of Rs 2,36,600 crore. The government should seriously look into ways for speedy recovery of bad loans through DRTs. In fact, there is a need to strengthen the working and to restructure  governance of the banks, PSBs in particular.