The debt recovery process in the cases of Bhushan Power & Steel Limited, Electrosteel Steels, Essar Steel, and Monnet Steel under the Insolvency & Bankruptcy Code (IBC) is expected to take longer than expected. These firms are among the 12 companies the Reserve Bank of India referred, in June this year, to the National Company Law Tribunal under the IBC. This means that banks will have to wait more to recover whatever they can from the defaulting firms.
This is despite the IBC being a time-bound mechanism for resolution and the entire issue of non-performing assets (NPAs) of public sector banks (PSBs) being in the full glare of media. While the debt recovery mechanism is being made stringent under the IBC and is likely to bring down NPAs, the real issues are not even being discussed in the quarters that matter: government ownership of PSBs and the continuance of such ownership.
Consider a few facts: According to recent reports and estimates, PSBs have written off NPAs over Rs 55,000 crore in the last six months, and Rs 360,000 crore in the last 10 years. Governments keep coming up with bailouts and recapitalisation funds; NPAs of banks keep rising. NPAs in PSBs rose rapidly from 5.43% (Rs 278,466 crore) in March 2015 to 13.69% (Rs 733,137 crore) as of June 2017. But the government again intends to provide Rs 2.1 lakh crore to them.
PSBs are not only a torture to the taxpayer—as ultimately he or she has to pay for bailouts and recapitalisations—but also a burden for the entire economy. This happens because the friends of political leaders get sweetheart deals from PSBs. Worse, they also become the beneficiaries of the “ever-greening” of loans—that is, top managements of banks continuing to lend to financially unviable projects so that they don’t show as NPAs in their own balance sheets.
Ever-greening is also linked to PSB ownership. The top brass of PSBs don’t own any equity in the bank. For instance, if Yes Bank goes bust, co-founder and managing director Rana Kapoor would suffer heavily; the same cannot be said about a PSB chairman. A PSB chairman is likely to turn a blind eye to the politician-businessman nexus.
Big, bad borrowers don’t just sink with their companies, but also take the lending banks along with them. Hence the “twin balance-sheet problem”, slowdown in lending, and the consequent baleful effects on growth.
Further, this triggers demands for farm loan waivers. The logic of those making such demands appears impeccable against the backdrop of instances of corporate and strategic debt restructuring: if the rich industrialists can benefit from bankers’ munificence, why shouldn’t the poor farmers as well?
But this plays havoc with the entire economy. An RBI paper in September said that farm loan waivers worth about Rs 88,000 crore in this fiscal by seven states, including Uttar Pradesh and Maharashtra, may jack up inflation on a permanent basis by 0.2%.
Then there is the issue of credit discipline. In a report in June, Kotak Institutional Equities said that frequent waivers may lead to “risks of impaired credit discipline and weak risk-reward for banks”. This leads to reduced credit availability for farmers. Earlier, in March, State Bank of India chairman Arundhati Bhattacharya had expressed the same fear. She had said, “Today, the loans will come back as the government will pay for it, but when we disburse loans again, then the farmers will wait for the next election expecting another waiver.” Bankers would be less inclined to lend to agriculturists.
With limited credit availability, the farm sector, which is already a laggard, can scarcely be expected to thrive. Doubling farmers’ income by 2022 will also remain a promise observed in the breach.
In other words, in the continuum of political economy, one relic of the socialist era, bank nationalisation is trying to suck the entire country into a vicious whirlpool of slowdown. The solution is obvious and has been repeatedly spelt out by experts for almost two decades: denationalisation. In May, RBI Deputy Governor Viral Acharya recommended reprivatisation of some PSBs. Two RBI committees, one under M. Narasimhan in 1998 and the other under P.J. Nayak in 2014, favoured bank privatisation.
Therefore, it is indubitable that bank nationalisation is the elephant in the room the powers that be are not willing to look at. The solution is obvious—denationalisation or privatisation. But policymakers instead keep toying with fancy ideas like the Indradhanush strategy, the Bank Boards Bureau, and the Bank Investment Company.
It is a curious situation: the problem is known, the solution is known, but such is the fascination with dangerous socialist ideas that everything other than the solution is tried. It is like recognising the evil of child marriage but, instead of eradicating it, favouring measures that would minimise the physical and psychological damage to the youngsters concerned.
Our redemption doesn’t lie in knowing the truth; it lies in acting upon the truth.