by Vivek Kaul
Also, it needs to be mentioned here that governments usually tend to underestimate their future expenditure. Hence, the Indradhanush estimate of Rs. 1,80,000 crore of capital being required by PSBs will also likely turn out to be off the mark. The amount of capital required by the PSBs will be more if they need to be in line with the Basel III norms.
Furthermore, if the government wants to continue owning the PSBs, it will have to spend a huge amount of money in the years to come. Prudence demands that the government let the banks raise the capital from the market and, in the process, dilute its stake in these banks.
If the government tries to keep its stake in the PSBs at its current levels, the chances are that it will end up running a huge fiscal deficit in the years to come. This will have repercussions which will not be good for the health of the Indian economy.
d)The Indradhanush reforms also talked about taking several steps to destress PSBs from the bad loans that they were carrying, particularly those of infrastructure companies. One of the points suggested was that “promoters be asked to bring in additional equity in an attempt to address the worsening leverage ratio of these projects”. If the promoters are unable to bring in fresh capital (i.e., equity) to bring down the leverage (i.e., the debt-to-equity ratio, basically), then the PSBs “would consider viable options for substitution or taking over management control”.
e)The Indradhanush reforms also pointed out a few things that the RBI had been doing to tackle the bad loans issue of PSBs. One of things pointed out was the new category of borrowers called the non-cooperative borrower. “A non-cooperative borrower is a borrower who does not provide information on its finances to the banks. Banks will have to do higher provisioning if they give fresh loan[s] to such a borrower,” the Indradhanush document pointed out.
f)Furthermore, the government has decided to set up six new Debt-Recovery Tribunals (DRTs) for the faster recovery of bad loans. This is an important move, given that the current DRTs have a huge backlog of cases. In 2013-2014, the amount recovered from cases decided by the DRTs had stood at Rs. 30,590 crore. The debt that was sought to be recovered had stood at Rs. 2,36,600 crore. Hence, the recovery rate was a measly 13 per cent.662
Also, the law indicates that cases brought to the DRT should be decided upon within six months. Nevertheless, only one in four cases pending before the DRT at the beginning of any year is decided upon during the course of that year. This suggests that it could take four years to clear all cases, if the DRTs just concentrated on old cases. In fact, in 2013-2014, the number of cases filed during the course of the year was one and a half times the number of cases decided upon during the course of the year.663
Hence, the country clearly needs more DRTs. It also needs more judges than the existing ones if the debt-recovery mechanism has to work at a faster pace. In fact, the DRTs were set up under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act of 1993. This was done in order to help banks to recover “their dues speedily without being subject to the lengthy procedures of usual civil courts”.664
Interestingly, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act of 2002 has enabled banks to recover bad loans without even having to approach the DRTs. But as Rajan said in a November 2014 speech:665
The SARFAESI Act of 2002 is, by the standards of most countries, very pro-creditor as it is written. This was probably an attempt by legislators to reduce the burden on DRTs and force promoters to pay. But its full force is felt by the small entrepreneur, who does not have the wherewithal to hire expensive lawyers or move the courts, even while the influential promoter once again escapes its rigour. The small entrepreneur’s assets are repossessed quickly and sold, extinguishing many a promising business that could do with a little support from bankers.
While the Indradhanush reforms were better than the government doing nothing, yet they did not tackle four basic issues. First, Indradhanush had nothing to say about the evergreening of balance sheets carried out by banks. This, as mentioned earlier in the chapter, was done through the route of banks restructuring loans and, in the process, postponing the process of the recognition of bad loans. The Nayak Committee had suggested that penalties be imposed if significant evergreening is detected.666
Indradhanush did not come up with any groundbreaking reform. Its core theme was the recapitalisation of banks. Nevertheless, rather surprisingly, it didn’t have anything to say about the bad loans that PSBs have accumulated over the years. As Rajiv Kumar, Geetima Das Krishna and Sakshi Bhardwaj write in a research paper titled ‘Indradhanush— Banking Sector Reforms’: “A framework for tackling NPAs is absent in Indradhanush.” They further point out that bad loans had accumulated partly due to “the manner in which these banks operate”.667
The second issue is the ability of the PSBs to recover bad loans from promoters who have defaulted. Rajan’s above-cited speech tells us that the PSBs haven’t been able to recover much, especially when it comes to large and influential promoters.
What do the numbers look like on this front? Let’s first take the case of the State Bank of India. As of April 1, 2015, the bank had Rs. 56,725 crore of bad loans, or gross NPAs. During the course of the year, Rs. 4,389 crore of bad loans was recovered. At the same time, the bank wrote off Rs. 15,763 crore of bad loans. The loans written off would no longer be a part of the balance sheet of the bank, even though they could be recovered in the future.
As we can see in case of the State Bank of India, the total amount of the loans written off during the year was more than three times the total amount of the loans recovered. That tells us the sad state of the loan recovery process. There were also fresh bad loans that were added to the balance sheet of the bank during the course of the year, and by March 31, 2016, the total bad loans of the bank had slipped to Rs. 98,173 crore.668
In fact, the scene wasn’t much different in 2014-2015, when SBI wrote off loans worth Rs. 21,313 crore and managed to recover loans worth Rs. 9,235 crore.
How do things look for the Bank of Baroda, the second largest PSB by assets? As of April 1, 2015, the bad loans of the bank had stood at Rs. 16,261 crore. During the course of the year, the bank managed to recover bad loans worth Rs. 1,481 crore. At the same time, it wrote off bad loans worth Rs. 1,554 crore. It saw fresh slippages worth Rs. 26,833 crore, and ended up with total bad loans worth Rs. 40,521 crore by March 31, 2016.669
Punjab National Bank, the third largest PSB, saw a similar trend. As on April 1, 2015, the total bad loans of the bank had stood at Rs. 25,695 crore. The bank recovered loans worth Rs. 4,262 crore. It wrote off loans worth Rs. 6,485 crore, saw fresh slippages worth Rs. 41,060 crore, and ended the year with bad loans worth Rs. 55,818 crore.670
In fact, as we can see from the following table, for each of the past four years, the write-offs have been greater than the recovery of loans. This tells us that banks have a limited ability to recover the loans that have been defaulted on.
Table 11.7: Write-offs versus recoveries for all PSBs over the past four years.
Year Write-Offs
(in Rs. crore) Recoveries
(in Rs. crore)
2015-2016 59,547 39,534
2014-2015 52,542 41,236
2013-2014 34,409 33,698
2012-2013 27,231 19,832
Source: Reserve Bank of India.
The hope is that the PSBs will be able to force defaulting corporate promoters to sell their assets to repay their loans. Take the example of JP Associates selling its cement business to Ultra Tech for over Rs. 16,000 crore after pressure from banks to bring down its debt burden.671 Videocon Industries has sold two telecom circles to Idea Cellular.672 The company has also sold its stake in the Mozambique gas fields for Rs. 15,000 crore.
The GMR Group has already offloaded stakes worth more than Rs. 11,000 crore in its roads, power as well as coal assets over the last two years. The Lanco Group has sold its Udupi plant for Rs. 6,300 crore.673
Hence, corporates who have defaulted on loans are being forced to sell their assets. The question is whether this strategy will work out on the whole. Also, this will need some patience on the part of the government to allow the market to do its work and clean up the Augean stables of bad loans.
Having said that, the Indradhanush reforms did nothing to tackle the issue of Big Government in PSBs. And this is the third issue that the reforms did not tackle.
The PSBs have dual regulators—the RBI as well as the Ministry of Finance. In fact, just between October 2012 and January 2014, the government issued 82 circulars to PSBs, leaving very little degree of autonomy to them.674
In May 2014, the Committee to Review Governance of the Boards of Banks in India (the PJ Nayak Committee) had submitted a detailed report on reforming the PSBs in India.
As the report submitted by the PJ Nayak Committee pointed out:
Governance difficulties in PSBs arise from several externally imposed constraints. These include dual regulation, by the Finance Ministry in addition to the RBI; board constitution, wherein it is difficult to categorise any director as independent; significant and widening compensation differences with private sector banks, leading to the erosion of specialist skills; external vigilance enforcement though the CVC (Central Vigilance Commission) and CBI (Central Bureau of Investigation); and limited applicability of the RTI Act. A more level playing field with private sector banks is desirable.
The Committee had also proposed a solution to these problems. As it said: “If the Government stake in these banks were to reduce to less than 50 per cent, together with certain other executive measures taken, all these external constraints would disappear. This would be a beneficial trade-off for the Government, because it would continue to be the dominant shareholder and, without its control [on] banks diminishing, it would create the conditions for its banks to compete more successfully. It is a fundamental irony that presently the Government disadvantages the very banks it has invested in [emphasis added].”
The Nayak Committee had proposed that the government’s stake in PSBs be moved to a Bank Investment Company, registered under the Companies Act. It had proposed that the Bank Investment Company should bring down its stake in the PSBs to less than 50 per cent.
In such a situation, the dual regulation of the PSBs would disappear, and the RBI would be the sole regulator of these banks. Furthermore, this would ensure that the PSBs have the ability to offer a competitive compensation structure which is in line with that of private banks. While the compensation structure of PSBs at lower levels is extremely competitive with that of private sector banks, the same cannot be said for the middle and upper levels, where the private sector banks offer employee stock option plans.
A government stake of below 50 per cent would also ensure that banks would be free from the external vigilance of the CVC as well as the RTI Act. The Committee had also recommended that the government should resist from issuing any instructions that are applicable only to PSBs.675
Fourthly, there is nothing in the Indradhanush framework which talks about either privatisation or the government bringing down its stake in PSBs to lower levels. The Modi government, like the previous Manmohan Singh government, wants to continue owning 27 PSBs. Also, by wanting to own 27 PSBs, the government has gone totally against the ‘minimum government-maximum governance’ philosophy that Narendra Modi had espoused in the run-up to the 2014 Lok Sabha elections.
The Nayak Committee had also proposed that the government follow the Axis Bank model, wherein the government is an investor rather than the promoter. “The CEO is appointed by the bank’s board, and because the bank was licensed in the private sector, it sets its own employee compensation, ensures its own vigilance enforcement (rather than being under the jurisdiction of the Central Vigilance Commission), and is not subject to the Right to Information Act.”
The Axis Bank model could be a good model to follow. If the government ends up with a minority stake in many PSBs, the chances are that even that minority stake would be worth more than what its majority stake is worth currently.
One logical reason for the government continuing to own banks is that the government needs to implement its social agenda as well, especially with schemes like Jan Dhan Yojana as well as cash payments being directly made into bank accounts. Nevertheless, the question remains as to why the government needs to own 27 banks for that. Owning four or five of the biggest banks would help implement its social agenda adequately.
Also, with the government continuing to own so many banks, the danger of the principal-agent problem having an impact on the performance of the PSBs continues to remain. Any reform which just tackles the current situation without doing anything about future possibilities is not really a reform.
In fact, this is not the first time that the government is bailing out the PSBs. This is the third time in the last twenty-five years that the government has grappled with PSBs loaded with stressed assets and bad loans. In the past, it had done the same in 1993 and 2001.
In fact, between 1993 and 1995, the government pumped in Rs. 10,987 crore into the PSBs for recapitalisation.676 This was when the gross non-performing assets of banks had reached 11.8 per cent of the total assets.
One argument that is made is that the amount of money that India has spent on recapitalising PSBs over the past three decades is one of the lowest in the world. In fact, the government has recovered more than the money invested through recapitalisation by the increase in market capitalisation of these banks. While this is a valid point, it does not take into account the fact that the money that went towards recapitalisation was money that was taken away from something else which may have been more important. It also does not take into account the opportunity costs of the market capitalisation that these banks could have achieved if the government had stopped meddling in them as much as it did.
Furthermore, three banking crises in 25 years clearly tell us that there is something very wrong with the way PSBs are operated. And the problem is the state, i.e., Big Government. So, when we know this, why not do something about it rather than come up with half-baked reasons in favour of the government having to put in more money into these banks?
Given this, now is the time to tackle the Big Government issue that is holding the PSBs back and has been costing the government as well. As the Economic Survey of 2014-2015 rightly points out: “When the next boom and bust comes around, India needs to be better prepared to distribute pain between promoters, creditors, consumers and taxpayers. Being prepared for the clean-up is as important as being prudent in the run-up.”
In fact, the 1991 Committee on the Financial System (better known as the first Narasimham Committee; M Narasimham was a former Governor of the RBI) had suggested that the duality of control over the banking system by the Ministry of Finance and the RBI be ended. This was recommended 25 years ago. The 1997 Committee on Banking Sector Reforms (better known as the second Narasimham Committee) had recommended that the government reduce its holdings in PSBs to 33 per cent and, in the process, give increased autonomy to these banks. The Committee had also recommended no further recapitalisation of PSBs by the government. But that is not how things have eventually turned out.
Another solution that has been offered is that the government can merge these banks and continue to own a few big banks. This has already been set in motion in June 2016, with the union cabinet clearing the merger of six banks (State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, and Bharatiya Mahila Bank Ltd.) with the SBI.
While merging subsidiary banks with the SBI is one thing, the same cannot be said about merging other banks. As R Gandhi, Deputy Governor of the RBI, said in an April 2016 speech:
PSBs as a group have not been performing well during the last few years. There has been a large increase in Non-Performing Assets (NPAs). As a part of managing large NPAs, some suggestions have been made: that perhaps a consolidati
on of PSBs can render them more capable of managing such challenges relatively better…. [The] merger of a weak bank with a strong bank may make [the] combined entity weak if the merger process is not handled properly. The problems of capital shortages and higher NPAs may get transmitted to [the] stronger bank due to [undue] haste or a mechanical merger process.
This is something that the government needs to keep in mind before taking any such decision. Bringing two banks which have their own sets of problems together won’t make those problems go away. It could, instead, compound them.
xvii TARP, or Troubled Assets Relief Program, was a programme launched by the United States government in the aftermath of the current financial crisis, which started in September 2008. The programme was launched in October 2008 to rescue the US financial institutions which were in major trouble. In this case, the Morgan Stanley analysts play on the acronym TARP and suggest that the Indian banks also need a TARP-like government rescue programme.
12. THE BIGGEST GOVERNMENT
Nothing is so permanent as a temporary government programme.
– MILTON FRIEDMAN677
In April 2016, the Bombay High Court ruled that some cricket matches of the Indian Premier League (IPL) T20 (Twenty-Twenty) cricket tournament should be moved out of the state of Maharashtra.
This decision basically led to thirteen matches that were scheduled to be played in the state between May 1, 2016 and May 29, 2016 (when the tournament was to end) being moved out of the state. This was done so as to save the water that would otherwise have been used to water the cricket pitches and grounds on which matches were scheduled to be held in Mumbai, Pune and Nagpur.
Many parts of Maharashtra were in the midst of a drought, with the monsoon having failed for the previous two years. In this environment, it wasn’t deemed to be fair to be wasting water on something as silly as a twenty-overs-a-side cricket tournament.