Never in their existence so far have they collectively faced a crisis such as the current one. A close look at a few critical numbers would reveal the extent of damage that has been caused to their financial health:
Their credit growth has been on a continuous decline for the last five years, and in December 2016 it was only 5.3% (annual) for SBI and its associates and 2.9% (annual) for nationalised banks. PSU banks are not only fast losing business share to other banks and NBFCs but are a now drag on the economy. To the extent that their inability or reluctance to expand credit is caused by their persistently high stressed assets (non-performing assets plus restructured loans and advances) – estimated at about 17% of their aggregate loans and advances and still rising — the problem has assumed a structural dimension.
This was indicated in an empirical finding in RBI’s annual report for 2014-15 that the NPA ratio (to aggregate loans and advances) and credit growth exhibit a high negative correlation.
And contrary to popular perception, there is no hard evidence that the high NPA of PSU banks is caused by any cyclical downturn of the economy or a fall in commodity price. If this were the case, then NPAs for small-scale industries would have been much higher. Also, NPAs of the private sector and foreign banks would have been similarly high.
The financial performance of PSU banks has also been on a sharp decline, with their return on assets (RoA) falling from about 0.8% in 2011-12 to negative 0.2% in 2015-16. Factoring in the slight increase in their leverage from 5.8 to 6.1 in the period, the return on equity (RoE) nosedived from 14% to negative 3.5%. Their equity shares are now trading at different deep discounts to book value, although some buoyancy in the prices of a few of them is observed, of late.
The gap between the financial health/performance and equity share valuation of PSU banks and new private sector banks, are now wider by several orders of magnitude. As the last Economic Survey observed (with some apparent consternation), the valuation of HDFC Bank alone was higher than all the 24 PSU banks taken together.
NPA surge - the genesis
The first signs of a sharp rise in the NPAs of PSU banks were seen in early 2012 on the back of a surge in ‘restructured standard advances’. The present NPA problem has its provenance in the generous, imprudent and perhaps politically-inspired restructuring leeway given to banks by RBI in 2008-09 and thereafter, which, among other things, created a bizarre incentive for banks to hide NPAs on a scale never witnessed before.
The reasons why PSU banks exhibited extraordinary zeal in taking advantage of this leeway and why RBI evinced significant supervisory forbearance by allowing PSU banks to sit on a massive quantum of overvalued loan assets till it undertook the asset quality review in early 2016 need to be found out. Both the government and the RBI owe an answer in this regard to Indian taxpayers.
Since the beginning of 2012, successive Financial Stability Reports (FSR) of RBI have played a kind of hide-and-seek game with their analyses and projections of PSU banks’ NPAs.
The projections made in the FSR of June 2012 for gross NPA (GNPA) ratio under severe stress conditions (entailing sharp deterioration in macro variables and spurt in short-term interest rate) for March 2013 and the actual GNPA ratio for March 2013 are shown in the table.
A curious aspect of the projected GNPA ratio for PSU banks is that the actual GNPA ratio has consistently turned out to be similar to or even higher than the projected one without the stress situations ever being realised.
This leads to an inescapable conclusion: the phenomenal rise in GNPA since March 2012 has little to do with the macro situation in later periods. It has largely been caused by the massive overhang of ‘restructured standard advances’.
Incidentally, the June 2012 FSR of RBI put the probability of a restructured standard advance becoming an NPA at only 15%. Four years later, the FSR of June 2016 admitted that an ‘increasing proportion of restructured advances are reckoned as NPA’. The GNPA ratio for PSU banks increased threefold between 2013 and 2016, while that of private sector banks rose only marginally.
A governance issue
Much has been written about and promises have been made by the political leadership on the need to create a mechanism enabling PSU banks to take appropriate business decisions in respect of NPAs, including write offs. But it is a known fact that banks do write off loans, sometimes in a big way.
The table, based on data from the annual reports of SBI tells an interesting tale.
The amount written off in 2014-15 included ₹65.58 billion (60.4%) in respect of NPA of ₹108.53 billion sold to an asset reconstruction company.
This puts paid to the argument that PSU banks do not take write off decisions involving deep discounts for sale or one-time-settlement of their NPA. If they want to, they do. What is perhaps the case is that PSU banks do not have board-approved precise and objective guidelines and processes for write-off decisions. The upshot here is that inability to take business decisions for resolution of NPA is a governance issue.
The last Economic Survey puts the gross non-performing loans for India’s banking system at $191 billion equivalent (8.4% of India’s GDP). The debt owed by the top 10 stressed business groups in India increased from ₹1,372 billion in FY08 to ₹7,519 billion by FY16. Bulk of the incremental debt in this period is likely to end up as NPA.
In our next column, we will evaluate the past solutions that have not worked, the feasibility of proposed current solutions, such as PARA (Public Sector Asset Rehabilitation Agency) and the recent amendment to the Banking Regulation Act, 1949, and finally, suggest the contours of a framework which we think might work.
( Sivaprakasam Sivakumar is MD, Argonaut Global Capital LLC, U.S. and Himadri Bhattacharya is Senior Advisor, RisKontroller Global )
