Indian banks have contributed to the deterioration of the economic condition, Ashutosh Misra explains how
Two recent advertisements in Indian newspapers highlight the reasons for the mess the Indian economy finds itself in. One was by the Delhi Agricultural Marketing Board seeking proposals from banks for depositing its money. Another was by the Punjab National Bank declaring a company as a loan defaulter. These are just symptoms of malignancy which afflicts the system. Banks have been lending to the wrong people. It could be because of corruption, crony capitalism or improper due diligence by the lenders. But whatever the cause, the effects are harmful for the economy and the country.
The fiscal state of the banks and scrips of some of them tell the tale. There has been a steady deterioration in the balance sheets of banks, especially those in the public sector. According to an RBI study, gross nonperforming assets (NPAs) have soared more than three times between March 2007 and March 2013. After declining from Rs 7 lakh crore on March 31, 2003 to Rs 5 lakh crore on March 31, 2007, NPAs shot up to Rs 18.39 lakh crore at the end of March 2013, an average growth of 24.7 percent in the last six years. Net NPAs have grown faster at an average rate of 29 percent since March 2007 to hit Rs 8.88 lakh crore in March 2013. The study estimates that NPAs have shaved more than 60 percent of net profit of banks since March 2010.
In a case of leaving the mess for successors, banks have also been pretty liberal when it comes to corporate debt restructuring (CDR). Stringent CDR norms that kick-in from 2015 are likely to curb the tendency of the companies to use CDR clean up their balance sheets instead of undertaking business restructuring. But the damage being inflicted till then will leave scars. Many lenders have discovered that the assets pledged with them either do not have the same value today as mentioned at the time of loan being granted or cannot be liquidated. Some borrowers have even pledged the same security to more than one lender. What is disturbing is that many companies under CDR may turn into bad loans if economic growth fails to revive. This will further harm the economy because as NPAs rise banks will shy away from lending. As the financial accelerator, made famous by the trio which included Federal Reserve chairman Ben Bernanke, starts working banks will cut down on lending when they must lend aggressively to revive economic growth. The credit crunch will result in further deterioration of economic growth and consequent rise in NPAs. It will result in a vicious circle where lending is curbed as the economy stalls even as more lending is needed to revive growth.
One of the effects of slowdown has been that banks are now focusing on retail lending such as housing, education and auto loans, and on non-metros instead of corporate and infrastructure sectors. This is also because corporate borrowers have put their plans on hold. In the past, banks especially from the private sectors such as the ICICI Bank were pulled up by the courts for hiring goons as loan recovery agents and harassing retail borrowers. The banks have not resorted to any strong-arm measures when dealing with the corporate delinquents. Hopefully this return to retail borrowers is not because they can be bullied and assets seized.
The Indian banking sector is set to be the fifth-largest in the world by 2020 and third-largest by 2025, according to a report. While it may sound good but it also means that the regulators, bankers and the government need to be more vigilant than before. The 2008 crisis has proved how imprudent, overambitious bankers can be a problem for the whole country or rather the world. The new governor of the Reserve Bank of India (RBI) Raghuram Rajan is credited with warning central bankers of the housing bubble in 2005, three years before Lehmann triggered the global crisis. Questions have been raised about his suitability for the job. The Economist had the following to say on his appointment at RBI: “He is not a specialist in monetary policy. His writings are of a free-market persuasion, tinged with skepticism about how rational investors are and worries about the unintended consequences of regulation.”
Rajan’s honeymoon with the stock and currency markets while looking for an excuse to find mention in the media has started on the right note. But he must realise that doing the right thing for the country and economy matters more than playing to the galleries. He must not deviate from the narrow path that will lead the country out of the mess created by the government even if it means letting the finance minister walk alone. Raghuram Rajan needs to listen to his team in the RBI and must let his work prove his critics wrong.
The salaried, farmers and the honest entrepreneurs have been doing their bit for the India economy and the country. Imprudent policymaking and, corrupt officials and businessmen have been the bane of the country. In fact the fence has started eating the grass. The need of the hour is for a level playing field where everyone plays by the book and, rules of the game are enforced strictly irrespective of his political and money muscle.
About Ashutosh Misra – India Correspondent. He is a senior business journalist who mastered the skills of the trade at the top India business daily, The Economic Times. He played a key role in the launch of Deccan Chronicle group’s business newspaper, Financial Chronicle