Cleansing of the Indian banking sector is long overdue

  • Hardeep S Puri
  • Updated: Dec 04, 2014 02:32 IST

To say that the challenge before the Narendra Modi government lies in the economy is stating the obvious. Alibis for non-governance, compulsions of coalition politics or other external factors will not be easily available to a government with an unambiguous mandate after a gap of 30 years. Tomorrow’s slogan, already beginning to take shape, will be ‘deliver or perish’.

Democratically elected governments cannot direct their economic entities on when and how to undertake economic activity or where to invest. They can only create an enabling environment conducive for economic activity and for attracting foreign direct investment (FDI). Global capital, whether from the United States or Japan, is unlikely to feel encouraged to invest in a country that slips 10 notches on the Global Innovation Index (GII) — the only one among the BRICS economies to do so and dropping two places to rank 142 in the World Bank’s Ease of Doing Business 2015 report, which ranked 189 nations. There is also little joy for India in Transparency International’s Corruption Perception Index or in the Global Competitiveness or the Environment Performance Index.

The Modi government’s attempts to inject a ‘feel good’ for economic activity are both necessary and welcome. It may not, however, be enough.

The culture of corruption and impunity, at worst and of nonchalance, ‘sab chalta hai’ attitude and inbuilt tolerance for incompetence and mediocrity, at best developed over the past several decades will, unless reversed, prove India’s undoing. It envelops all sectors of the economy — banking, health, transportation, real estate and all others.

The party routed in the May elections, apart from getting its house in order, should draw inspiration from the words of a wise man, the XIV Dalai Lama: “Remember that sometimes not getting what you want is a wonderful stroke of luck.” Equally, the party that feels triumphant might do well to recall a saying in the multilateral system: ‘Beware of what you seek, you might get it.’

The total bad loans or non-performing assets (NPAs) and restructured assets of Indian banks developed over a period of time stand at about $100 billion. Of this around 45% or $42 billion constitute NPAs and the remaining $58 billion restructured loans. The manner in which the NPAs were converted and shown to be restructured loans also raises serious issues.

The restructured assets in the banking system will shoot up by $10-16.6 billion by the end of this financial year. Analysis of the credit metrics of the top 500 corporate borrowers, with an aggregate debt of $477 billion, which constitutes 73% of the total bank lending to the industry, services and export sectors paints a worrying picture. Around 82 of these 500 borrowers have already been formally tagged as financially distressed or identified as NPAs, or their loans have already been restructured. Another 83, that is 17% of these top borrowers, accounted for 9% have severely stretched credit metrics. Within these 83 corporates, operating profitability barely covers the interest required to be serviced in most cases. The limited purpose of pointing to the trends above is to drive home the point that the ‘Swachh Bharat’ campaign for physical cleanliness needs to be extended to cover the banking sector as well.

It is not difficult to distinguish between healthy entrepreneurial capitalism and its distant cousin, nefarious ‘crony capitalism’. The latter, by definition, requires active collaborative connivance by sections of the government and encouragement in the banking system.

The NPAs can be created even if due care and diligence is exercised while extending credit. Absent due diligence, the generation of NPAs will most certainly be much faster. The market buzz, not always completely reliable but invariably a good indicator, suggested the asking rates for appointing EDs and chairmen of public sector banks five years ago were Rs 5 crore and Rs 8 crore, respectively. Rates reportedly have risen sharply in the last five years. As in other parts of the system that comprise India’s crony capitalism, the files for appointment come squeaky clean, all the candidates come with outstanding confidential report appraisals, even the ones who subsequently get raided and exposed. It would be instructive to see how often, during the last 10 years, the criteria of eligibility were changed to facilitate the appointment of particular individuals.

The top 15 private groups in the country account for nearly 17% of bank credit and have a cumulative gross debt of approximately $166 billion. Admittedly, the debt of these 15 top business groups also possibly includes external commercial borrowing as well. The BSE 500 companies cumulatively have a gross debt of over $500 billion.

A system that generates $100 billion worth of NPAs and restructured loans lies at the heart of the system of crony capitalism that has developed. Equally, the control the government exerts on top appointments in banks and, possibly, their loan books and the issue of most State-owned banks in India having roughly five times as many bad loans as private ones need to be addressed.

The cleansing of the banking sector that the Prime Minister and the Union finance minister have embarked on has been long overdue. We have to stem the rot within if we want India to survive.

(Hardeep S Puri, a retired diplomat, was India’s permanent representative to the United Nations in Geneva and New York. The views expressed by the author are personal.)

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