Light at the end of the NPA tunnel

Three years after coming to power, the Narendra Modi government has at last taken a key step which has a chance of making a reasonably quick impact on the critical problem of unbearably high levels of non-performing assets of public sector banks. These (gross non performing assets) have gone up from 3.6 per cent in 2013 to a colossal 9.3 per cent of advances for 2016 on repeated central bank prodding to stop hiding things.

Under an ordinance, the government may now authorise the Reserve Bank of India to direct banks to initiate insolvency proceedings against defaulters under the bankruptcy code. Indeed, the RBI on Tuesday listed 12 NPA accounts for insolvency proceedings. Government authorisation means the highest political backing for the insolvency proceedings. This takes care of two reasons why, instead of slowly declining, the NPA problem has only gotten worse. One is that political connections have a lot to do with large corporate loans going sour. So for resolution the issue has to be addressed on the say-so of the political authority of the day. This the ordinance does.

It also addresses the second reason for lack of progress. Senior bank officials so far simply did not risk their necks structuring deals which involved writing off a part of the loan. Now they will be acting under RBI directives.

Once bank balance sheets are lightened of the load of very high NPAs, there can be a return to normal business activity of sanctioning fresh loans. In this, the earlier government action to set up a Banks Board Bureau, which is tasked to identify capable senior executives to run the banks efficiently and improve governance levels, can play a key facilitating role. After all, part of the problem was created by the wrong kind of people getting into leadership positions in banks.

Any optimism on this score must however be tempered by the sudden resignation and subsequent withdrawal of it by a non-official member of the board on it being reportedly bypassed by the government while shifting a couple of bank chief executives to lesser banks. Clearly, certain habits die hard. But if all goes well hereafter, then the ruling NDA should be able to go into the next elections due in a couple of years touting the achievement of having set right the balance sheets of public sector banks. This will enable these to continue as public sector entities.

But what if this does not happen and the next government (it does not matter which outfit it is because in some respects most Indian politicians are similar) begins with the same set of problem-ridden public sector banks whose condition has only gotten worse?

To find a way out, what if post-2019, the government of the day decides to look at privatisation also because of the huge cost to the exchequer in write-offs and recapitalisation ? The prospects of privatisation do not look bright either because of the banks’ inadequate capitalisation and non-existent (in fact negative) brand value. About their only asset, a large branch network, is also currently devalued with the onward march of digital banking.

And when it comes to the little woman taking a small loan, the representative of a small finance bank will probably readily come to her doorstep. The government is trying to get around all this by seeking to merge the weak with the not-so-weak but this is likely to be counter productive as it will only result in the not-so-weak becoming weaker.

The full road ahead is not visible but an intermediate key step has been outlined.

In this scenario, with the merger of the small weak banks with a few large ones we will have maybe five large strong public sector banks without going in for the politically unpopular agenda of privatisation.

Will these few large healthy public sector banks be able to run successfully with professional managements chosen by the Banks Board Bureau? This is theoretically possible but quite unlikely given India’s current political culture which cuts across party lines.

The writer is a senior journalist and the author of Made in India: A Study of Emerging Competitiveness

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