Amid crisis in banking, fresh risk for the RBI

The banks, especially nationalised ones, in India have been in a perpetual state of crisis.

In any economy, the banking system is the steel frame that holds it all together. Banks can go bust when depositors withdraw money in panic, or when the companies or people to whom they give loans are unable to return them. The system is in crisis when the bad loans equal or exceed the capital of the banks. It is saved only when governments bail out the banks by putting in more money to “recapitsalise” them. The banks, especially nationalised ones, in India have been in a perpetual state of crisis. The bankers on instructions (a phone call) from powerful politicians extend loans to dodgy promoters. The rot starts with top appointments that are made in deals in which both top managers and their political bosses share the cut. The practice has been going on for so long that, it became part of business lore, until RBI Guv Raghuram Rajan clamped down, The crucial factors are the percentage of loans that are “non-performing”, the infusion of public money needed to save the banks, the pressure that can be put on promoters to return the money, and the effect of all this on the economy. The June 2016 Financial Stability Report (FSR) brought out by the RBI quantifies the crisis.

This was because the gross non-performing advances (GNPAs) of banks “sharply increased to 7.6 per cent of gross advances from 5.1 per cent between September 2015 and March 2016.” Besides this, the banking sector’s GNPAs showed a sharp increase year-on-year of 80 per cent despite the low growth of credit. The growth of bad loans was not evenly distributed. It is the large borrowers who do not pay back. The ratio of bad loans of large borrowers increased sharply from 7.0 per cent to 10.6 per cent during September 2015 to March 2016. Moreover, “there was a sharp increase in the share of GNPAs of top 100 large borrowers from 3.4 per cent in September 2015 to 22.3 per cent in March 2016.” The crisis in the banking system is thus largely a result of the big borrowers’ inability or unwillingness to pay. One recalls the ever-flamboyant Vijay Mallya, who did not settle his dues to the banks and took refuge in the UK.

The debt owed by some of the biggest companies in the power, transport and steel sectors made for compelling reading in a report “The House of Debt” by merchant banker Credit Suisse. The report mentioned 10 top debtors. The total debt of these 10 groups was Rs 7.32 lakh crore (or trillion). The debt of these groups has risen seven times over the past eight years and some of these groups are carrying an interest burden that exceeds their earnings before interest and taxes. Not all these loans are bad, and many of these business groups are selling part of their assets to reduce their debt. Still, around Rs 4 trillion will be needed by the government if it is to recapitalise the banks. The pumping of money into banks comes from the government’s budget expenditure.