The State Bank of India, today’s public sector banking mother-ship, was the former Imperial Bank of India. It was the first to be summarily nationalised by the Jawaharlal Nehru administration in 1955. Justifications for bank nationalisation include promotion of “social welfare, controlling private monopolies, expansion of banking, reducing regional imbalances and priority sector lending”. Prime Minister Indira Gandhi nationalised 14 banks in 1969. And again, another five of them in post-Emergency 1980. All this, in a frenzy of misguided socialist inspiration that never yielded more than 2% growth in GDP per annum for five decades or more. But banking was not the only sector suborned to work for “social uplift”, rather than “neo-colonial” profit.
The entire system and administration, including the Indian Administrative Service (IAS), the judiciary and the Planning Commission, was harnessed to promote socialism. Combined with the peculiar restrictiveness of the infamous Licence-Permit Raj, it was very difficult to be entrepreneurial indeed. At least, till the economy was first-stage liberalised in 1991. And this too was forced on the country due to a foreign exchange cum balance of payments crisis that hit the economy.
But quite soon after the advent of nationalisation, the record began to show, the public sector banking system (PSU banks) was disproportionately serving a witch’s brew of politicians and their crony businessmen. This, alongside the richer farmers and fixers, rather than the impoverished—with rural branches, loan melas and the like. This distortion between intent and practice has not been resolved to date.
Gradually, as the banking pie grew, the farmers ended up with a small slice of PSU banking loans, and businessmen, sometimes proxying for the enabling politicians, got the lion’s share. And as any bribe-giver will tell you, once he has paid off banker and politician alike for the money given out, he’s not about to give it back. The larger farmer, not to be outdone by his rich co-borrowers, also started merrily defaulting on those loans that were not wiped out by a vote-seeking government. The landless and marginal farmers, sincere about their debts, routinely commit suicide when unable to pay back what they owe.
Taxpayer money and government debt have been utilised meanwhile, without a by-your-leave or any serious attempt to fix responsibility or punish the guilty, to recapitalise over Rs 1.5 lakh crore spread over the last 30 years.
But now, thanks to the momentum and scale of plunder during the UPA decade between 2004 and 2014, the banks will need a minimum transfusion of over Rs 2 lakh crore. This is to partly amortise over Rs 10 lakh crore ($150 million), in “non-performing assets” (NPAs). Nearly 80% of these list private companies as the borrowers. These were exuberantly loaned large sums without adequate scrutiny or safeguards, in the boom years between 2000 and 2008.
When the tide went out, after the economic slowdown post 2011, the defaulters turned out to have come from textile, aviation, mining and infrastructure sectors. Basic metals had 45.8% gone bad. Cement had 34.6% in bad debt.
In 2016-17, the Narendra Modi government wrote off PSU bank loans worth Rs 81,683 crore, with the bland assurance that borrowers of these loans would continue to be liable for their payment.
Despite the number of sizeable scams and defaults flushed out of late, it is still a tenth or so of the entire loan book. The PSU banks could have, when all is tallied, bad debts at 10-12%. It does place India with the second highest ratio of NPAs even at a 9.6% assessed so far. Only Italy has a worse figure at 16.4%. A small country like Greece has 36.3%. Ukraine has 30.5%. China claims to have just 1% in NPAs, but this is doubtful given its internal debt at 2.5 times its $12-15 trillion GDP.
Europe saw a number of near sovereign collapses post 2008. The bailouts have been legion—at the rate of billions of dollars per month and zero interest rates. Otherwise, the US would have experienced a second Great Depression, and the EU would have broken up. It has, in any case, taken a lateral casualty, in the form of Brexit that threatens, even now, to tear apart the United Kingdom.
“Moral Hazard”, despite its merits, was not thought to be a viable argument, in order to save the world economy. The malaise had spread too far and wide into the real economy to withstand the crack of a whip.
In India too, we are fortunate that we have the wherewithal both to absorb such blows and move on to a better tomorrow. This is not to say the government is not making every effort to both recover monies and catch/punish the culprits.
All things taken together, this is an undeclared crisis. It is, after all, a vast sum to lose because of criminal neglect and collusive corruption. But, at the same time, it is mitigated by an economy grown to $2.5 trillion, with a GDP growth rate of over 7% per annum, the fastest for a major economy in the world. One that is likely to double to $5 trillion by 2025, and become the third largest from a current fifth largest. The bad debt problem, causing justifiable outrage because of a score of rich company promoters responsible, is not yet, in absolute terms, alarming. It won’t capsize India’s economic boat.
The PSU banks have strayed very far from their founding objectives. That it now accounts for 80% of banking credit in India is another reason why it is central to the problem. Huge dubious loans have stayed hidden for years, as politicians, bureaucrats, bankers and borrowers colluded to restructure debt, kicking the can down the road. But, in 2015, the Reserve Bank of India (RBI) issued guidelines that forced banks to own up. Still some are still trying to dodge the diktat and have been censured and fined heavily, a couple of them very recently.
Private and foreign banks, albeit fewer in number, also have their NPAs in the Rs 1 lakh crore region, suggesting much better loan-vetting and governance, and presumably, reduced levels of corruption/collusion. But the recent Nirav Modi/Mehul Choksi scam has not spared them either.
Would this bad debt balloon have gone up if the PSU banking sector stayed away from private enterprise? Would the reckless lending and subversion of banking systems have shifted to the private banking universe instead? It is hard to say. The borrow-and-spend boom in the West lasted 20 years, and when the party ended, it produced a hangover that has already lasted a decade too.
India’s NPAs, bad as they are, did not come via bad property mortgages and fraudulent derivatives to trade in. Yet, everything looked very profitable in the West too, right up to the edge of the precipice.
Theoretically, the cure for the Indian PSU banking malaise could still be privatisation, if only to keep the politicians out of the till. Any amount of regulatory tightening in reaction to the present goings on cannot keep the discretionary powers of politicians at bay. Instead, over-regulation is likely to dry up credit, thereby damaging the growth of the economy. Or it would shift the action to private banks and the stock/debt market instead. That
could, of course, be a good thing.
On the fix-it side of things, there is talk of using big data analytics and constant technology upgrade for automatic machine monitoring.
Reform of the PSU banking sector must happen. Some analysts say, keep the State Bank of India to go back to basics—priority sector lending, distribution of subsidies, loans to the poor, etc.—but get shot of the rest.
The politicians, beyond lip-service, won’t want to lose the funding and patronage the PSU banking system affords. They will want to wait for these scandals to blow over for resumption of business as usual. But if this Prime Minister can attempt the privatisation of Air India, he can do likewise for the PSU banks too.
A proportion of the current NPAs, may well be recovered—though the banks are themselves reluctant to take a sharp “haircut”. By untangling stuck infrastructure projects, against which there are substantial borrowings, there will be substantial relief. Also, the vigorous implementation of the new bankruptcy law aimed at seizing unencumbered assets and the Fugitive Defaulters Bill, about to be enacted, will allow the confiscation of every asset of those who run away.