I first started creating a noise in Parliament about rising non-performing assets (NPAs) of public sector banks (PSBs) in 2010. The gross NPAs then stood at ₹54,179 crore. This has now ballooned to about ₹4.04 lakh crore, nearly an eight-fold jump from December 2009. This gift given to us by the UPA government is the single biggest reason for the drag and impairment of our economy. Given that these bad loans are all in taxpayer-owned banks, it effectively makes each taxpayer liable by ₹1.14 lakh, if these banks are to be bailed out.

The mid-year economic analysis and the quarter-end results of PSBs show that nine PSBs have made combined losses of a staggering ₹11,251 crore. The total bad debts of PSBs have risen from ₹5,551 crore in FY2012 to ₹52,542 crore in FY 2015.

Beaten at the market

Additionally, stocks of all major PSBs have fallen between 40-60 per cent over the past one year. Of the 24 listed government banks, 20 stocks now quote at less than their official book value.

This deterioration has put a spade on any attempts towards disinvestment and share sell-off due to the falling stock prices of these PSBs. The losses incurred by the PSBs and their inability to provide credit are hampering the sustainable growth of our economy and employment creation.

The Economic Survey stated that one of the most critical short-term challenges confronting the economy is the twin balance sheet problem — the impaired financial positions of PSBs and some corporate houses.

This twin balance sheet challenge acts as a major impediment to private investment and a full-fledged economic recovery. The survey, in fact, attributes the sluggish growth of the economy to the unwillingness of banks to lend credit on account of rising NPAs, and more attractive interest rates for borrowers in the bond markets.

I have been repeatedly raised concern regarding the deteriorating financial health of PSBs, NPAs and recapitalisation, and concentration of risk many times since 2010. I have urged since then successive finance ministers to take remedial measures to arrest the decline in financial performance of the banks, reduce concentration of risk and take action against defaulting promoters.

Big ticket losses

In the last three financial years, a total of ₹1.14 lakh crore-worth of bad loans were written off by 29 PSBs, which is more than what they had written off in the last nine years.

These write-offs point to the rot in PSBs. Majority of this money is owed by flashy billionaires whose philosophy seems to be, “It is not in our principle to pay interest, nor is it in our interest to pay the principal.” This is a rot that has been developed in the last decade of government-mandated lending and crony capitalism.

One of the most important and crucial takeaway from Budget 2016 is the way the NDA is tackling the massive problems of NPAs. It is a great demonstration of how problems should be solved. The government has, in this budget, not just blandly committed to providing ₹25,000 crore for recapitalisation of banks, but has also taken on structural changes such as the announcement of Banks Board Bureau; expediting the implementation of the Indradhanush plan; addressing structural issues in stressed sectors such as power, coal, highways, sugar and steel; proposing to make an amendment in the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) and bringing the insolvency Bill which was a long-pending demand.

This resonates with what I had said in my Budget speech of 2014-15 in Parliament regarding the capitalisation of PSBs — that capitalisation must be accompanied with significant restructuring and reorganising of these banks and how they are managed, especially in areas of risk and credit assessment.

The revival of PSB banking system is critical to sustainably growing out economy, especially given its important role in servicing under-banked sectors of our population and, hence, the following structural banking sector reforms are required urgently. These are also consistent with the Economic Survey’s 4R solution set of recognition, recapitalisation, resolution and reform.

Change agenda

The government can start by speeding up the implementation of the ‘Indradhanush Plan’ that was released in August 2014. The document rightly called for a seven-pronged strategy to revive PSBs, covering a comprehensive range of issues such as appointments, Banks Board Bureaus, capitalisation, de-stressing PSBs, empowerment, framework of accountability and governance reforms. There should be a timeline by which the government must implementthe recommendations of Indradhanush.

The government has taken a step in this direction by announcing the formation of Banks Board Bureau and appointing Vinod Rai as its chairman.

Second, the government needs to ensure the passage of the Bankruptcy Code Bill in this session, as has been announced by the finance minister, so that banks are given sufficient power to get their money back without being trapped in judicial processes, which many wilful defaulters hide behind.

This would also allow sick companies a way out which currently is extremely difficult. The Economic Survey points out that the ‘Impeded exit has substantial fiscal, economic, and political costs’.

There is also a need to create a public asset reconstruction company (ARC) which will allow banks to focus on lending, rather than recovery of stressed assets. Consolidation of bad loans can simplify resolutions. It has been seen that consortiums currently make things complicated. A public ARC made by political will and backing and with the support of the RBI can lead to faster resolution of NPAs.

Fourth, the government must review and reform the legal process of enforcing securities. Despite the SARFAESI Act, the process by which banks enforce the borrower’s obligations in terms of security and guarantee is expensive, exhausting and time-consuming.

The issue of NPAs involves the hard-earned money of our innocent taxpayers, who are the real owners of these PSBs. The tax-payers are the ones who are left holding the bill of this mismanagement. Amongst other things, the banking regulator needs to answer them.

The writer is a Rajya Sabha MP

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