Can’t fix NPAs without knowing their true extent
Had India’s public sector banks been more prudent and proactive—or, more accurately, had the central bank insisted on this in the past—while provisioning for sub-standard accounts and what is being called emerging-stress, they would have been in a far happier position than they are in today. Forced by Reserve Bank of India (RBI) to classify assets by taking emerging-stress more realistically and provide for this accordingly, banks now have to set aside large sums of capital, in a short time span, which is hurting their bottom lines and the confidence of investors; so much so, that much smaller private sector banks are being valued at levels close to those of giant PSU banks. State Bank of India’s profits fell 62% over a year ago, to R1,115 crore in Q3FY16, thanks to fresh slippages of R20,692 crore—had RBI’s new Asset Quality Review (AQR) norms not been in place, the slippage would have been R14,792 crore less—while Punjab National Bank’s profit plunged 93% on fresh slippages of R13,500 crore.
The clean-up will require large sums of capital that will hamper the ability of banks to grow their loan books. But the central bank is right when it says the problem requires surgery rather than the application of a band aid, an approach its previous heads seemed to be comfortable going along with. While the earlier approach was predicated on higher economic growth which would help fix the problem, Governor Raghuram Rajan pointed out yesterday that, often, the low economic growth—that precipitates the problem—tends to persist longer than expected. In the event, surgery is the only approach to putting the project back on track, although that requires lenders to write down loans and promoters to write down equity, both quite sharply. The Governor’s thoughts on asset classification couldn’t be more pertinent. As he said, balance-sheets need to reflect the true quality of the books; disguising toxic assets as standard loans to prop up profits cannot be a good way to run the business. In fact, there should be no forbearance whatsoever for either restructured or sub-standard assets of any kind, and a situation of the kind we are seeing today must not be allowed to recur. The purging has already cost banks, and their owners, a lot in market value—the combined market capitalisation of state-owned lenders has collapsed by R100,000 crore since January 1—but this pain is all for the best.
However, providing correctly for an exposure doesn’t necessarily mean all is lost. Even as they clean up their books, banks need to work on recoveries. While the legal system is probably more a hindrance than a help today, lenders must use whatever resources they have at their disposal to get back their money. And that means the government has to help by, if need be, strong-arming promoters to ensure they pay up by pressuring them to liquidate assets. In the meanwhile, apart from allowing bank boards to function autonomously, the government has to support banks with fresh and timely infusion of capital so as to avert a breach of norms.