Budget 2020

A rocky ride for banks over the past five years

Radhika Merwin | Updated on February 01, 2019 Published on February 01, 2019

Deteriorating bank balance-sheets, steep rise in bad loans and no meaningful recovery in capex have left the sector reeling

Even before the BJP-led government came to power in 2014, banking stocks had zoomed on hopes of big-bang reforms at the Centre. Five years on, the optimism has long faded and given way to a prolonged spell of under-performance. The Finance Minister’s buoyant pitch on bank reforms in the Budget hence does not generate much enthusiasm.

Over the last five years, deteriorating bank balance-sheets, steep rise in bad loans and no meaningful recovery in capex have left the banking sector reeling. While all hopes were pinned on the Insolvency and Bankruptcy Code, the slow progress till now has only put recovery efforts on the back-burner, hurting banks and the economy at large.

Spate of bad news

Even as credit growth sputtered and fell 9-10 per cent in the two fiscal following the Narendra Modi’s historic victory in the 2014 general elections, banks had far more grave challenges coming their way. It was in the December quarter of 2015, that the first blow was served.

The RBI’s asset quality review (AQR), which was intended to flush out the rot from the banks’ balance sheets, led to steep slippages. Despite the massive clean-up, the RBI embarked on another Swachh Banks Mission. The central bank’s circular on ‘Disclosure in the Notes to Accounts to the Financial Statements – Divergence in Asset Classification and Provisioning’, in April 2017 (though its reference was made in the September 2015 policy), led to huge divergences being reported by banks — for both private and public sector banks. In FY17, about ₹1.3-lakh crore of bad loans were added to the banking system and credit growth slumped to multi-year low of 5 per cent.

The biggest blow to banks came from the RBI’s February circular last year which essentially did away with all the old restructuring schemes. The upshot of this was that public sector banks reported a massive ₹85,000 crore of loss in FY18. After peaking in the March quarter, while bad loans have slightly come off in the September and December quarter, the bigger issue is that the much-touted IBC is struggling to make any significant headway in as far as hastening recovery and unlocking value of assets of defaulting companies goes.

Slow progress under IBC

About 1,484 companies have been admitted under the Corporate Insolvency and Resolution Process (CIRP) since the implementation of the IBC, according to data put out by the Insolvency and Bankruptcy Board of India (IBBI), as of December 2018. Of these, 142 have been closed on appeal/review, while only 79 have seen approval of resolution plan. In 302 companies, liquidation has been ordered.

Undue delays in the IBC process is starting to hurt banks, already weighed down by steep provisioning and litigation costs. For most cases, the extended 270-day deadline is proving to be a dead letter and is worrying. IBBI data suggest a chunk of cases (about 441) have been under CIRP for over 180 days. Delays aside, it is also hard to ignore the steep haircuts that banks have been taking on these cases. The amount realised against claims fell substantially in the September quarter as against the June quarter, when two of the big 12 cases — Electrosteel Steels and Bhushan Steel — bumped up the realised amount. Subsequent resolution of large cases such as Monnet Ispat and Amtek Auto at less than a third of their total claim amount, suggests that lower realisation could become an issue as we move down the pecking order of cases. In the December quarter, barring the full recovery on the Binani Cements account, most others saw 30-40 per cent recovery.

Capital infusion

In the past, various governments infusing capital into PSU banks has only increased the moral hazard and achieved little. Sadly, the Modi government’s big bank recap plan announced in 2017, entailing a massive infusion of ₹88,000 crore into PSBs, has also fallen flat on its face. The RBI pulling three banks out of Prompt Corrective Action Framework (PCA) recently was mainly on the Centre’s assurance of pumping in capital as and when required. But unless the Centre hastens governance reforms, throwing good money every year into ailing PSBs may achieve little.

Published on February 01, 2019

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