PSU banks aren’t the only ones to blame
With impaired loans for PSU banks crossing 12% of advances, as RBI Deputy Governor KC Chakrabarty points out, the NPA problem could become a lot more serious. With a fifth of all recast loans likely to go bad this year, as compared to 15% till last year, this means the government will have to shell out large sums to recapitalise banks. Were NPAs to rise by 50%, Chakrabarty points out, this will shave off over 15% of the capital of banks; if 30% of restructured loans are to be written off, over 18% of bank capital will be wiped out—keep in mind SBI was downgraded the last time around only because of delays in capital infusion. Interestingly, even when NPA ratios were falling till March 2011, this was largely due to banks being able to write them off thanks to buoyant balance sheets in a growing economy—between 2007 and 2013, while R91,000 crore of NPAs were reduced with accounts being upgraded, R1,41,000 crore were written off and R1,18,000 crore was actually recovered. The share of recoveries as a proportion of the fall in NPAs is down from 48% in March 2001 to 28% in March 2010 and rose marginally to 29% in March 2013. Such low recovery rates should worry both RBI and government since this is related to DRTs and the Sarfaesi mechanism not working.
There is little doubt PSU banks fare worse than their counterparts in the Indian or foreign private sector—while their share of loans remained at a little over 75% between March 2009 and September 2013, their share of bad loans rose from 64.5% to 86.1%. But the role of government in this has to be recognised. While the impaired asset ratio of 9% for priority sector lending as on March 2013 is lower than the 13% for the non-priority sector, it is still significant. In the case of the R2,30,000 crore of loans before the CDR cell by July 2013—NPAs are around R1,93,000 crore—around a sixth is loans to infrastructure sectors like roads and power, another fifth is to the steel sector. Though neither PSU banks nor RBI have compiled the data in this manner, apart from the obvious role of lower economic growth on assets like steel getting stressed, it is apparent government delays are an important NPA-creator. After all, if a power project built from bank debt is not able to get coal, the loan will be stressed for no fault of the bank—and there are enough such examples of even private banks being caught short due to fuel linkages or environment clearances not coming through or due to SEBs getting bankrupted by populist policies and not being able to pay their bills. PSU banks are to blame for not being alert to warning signs—for 10 corporate groups, Chakrabarty points out, while bank credit more than doubled between 2007 and 2013, their overall debt rose 6 times. But there are larger lessons to be learned for all concerned.