Where lies the truth?

NPAs Conundrum

By Shivaji Sarkar

The nation is in a quandary. It wants to know who is telling the reality of bank non-performing assets (NPA) — Raghuram Rajan, who functioned as the RBI Governor from September 5, 2013 to September 4, 2016 or the NITI Ayog Vice Chairman Rajiv Kumar.
Rajan also held the position of Chief Economic Advisor during 2012-13. In a note to Parliament’s Estimates Committee, headed by Dr Murali Manohar Joshi, Rajan said that banks’ functioning during 2006-08 is responsible for the NPAs. Kumar pinned the blame squarely on Rajan’s policies as the Central bank Governor, his deleveraging of credit and slowdown in economy due to rising NPAs.
“When this (NDA) government came into office, this figure was about 4 lakh crore. It rose to 10.5 lakh crore by the middle of 2017,” said Kumar and added that “Under Rajan, they had instituted new mechanisms to identify stressed assets and NPAs. This is why the banking sector stopped giving credit to the industry.” It is sheer mud-slinging. The people need to know. What Rajan is saying is contrary to what the Reserve Bank documents reveal.
There was problem in 2005-06 and the RBI found it was due to unbridled disbursement of retail loans. It hit 33 banks to the tune of Rs 19,062 crore, peanuts compared to the today’s figures of Rs 10 lakh crore. In 2004-05, addition to gross NPAs of these banks — 26 public sector banks, five private sector banks and two foreign banks was Rs 17,756 crore. Fresh generation of NPAs in wholesale loans in 2005-06 was not large, as many bad and potentially bad accounts had gone through debt restructuring and the industry has, in general, been doing well for the last couple of years.
On March 31, 2006, addition to net NPAs for 2005-06 in absolute terms was Rs 10,248 crore for 31 banks, 16.18 per cent more than Rs 8,820 crore a year earlier. This was cited by the RBI as decisions taken by the banks themselves. The situation as per other reports started deteriorating post-2007-08 as the sub-prime crisis led to meltdown in the West. This was the time the UPA government started “incentivising” the industry and opened up bank coffers for giving large loans. Many industries did not possibly need such largesse but nobody wanted to miss on it.
Too many loans were reportedly given to well-connected promoters with a history of default. It was aided by an inefficient loan recovery system. The correction process with the new bankruptcy law and other stringent measures were introduced recently by the Modi government.
So the Economic Survey of 2016-17 (ES) pointed out that 50 large companies were responsible for the NPAs. What was pointed out was that the biggest loan defaulters were power, steel, road, infrastructure and textiles. This has led to hit a record high of Rs 9.5 lakh crore at the end of June 2017. Is it a coincidence that the record rise coincided with the term of Rajan?
The ES quoting Credit Suisse data says that the top 10 stressed corporate groups owe Rs 7.52 lakh crore in 2016. It was Rs 45,400 crore in 2006. Total non-performing assets are estimated at about Rs 12 lakh crore, part of which has been restructured — repayment officially delayed. At least 13 of the public sector banks, says ES, accounting for approximately 40 per cent of total loans are severely stressed.
Rajan also writes that he had written to the Prime Minister about the crisis. Good, but he does not say which Prime Minister or when — before 2014 or later. But on February 7, 2018, Prime Minister Narendra Modi in his speech on motion of thanks alleged that the middle men looted the banks during the UPA regime. “The rising NPAs had dealt a deathly blow to the banks”.
The RBI working paper series 3 of February 7, 2014, when Rajan was Governor, mentions the period 2001-2006, a major part of Atal Behari Vajpayee’s NDA government was marked by a sharp decline in the growth of gross NPAs and was marked by rapid product innovations and increased financial deepening.
The paper further states that after a sustained improvement, NPA ratio witnessed a steep increase from 0.2 per cent as at end-March 2011 to 8.2 per cent by June 2012, indicating repayment defaults, post-2007-08 when recklessly loans were distributed. Was Rajan referring to this period when he indicated political interference?
The RBI paper of November 8, 2010 marks 2008-09 as the crisis year. This was the period when lending increased but repayments slowed down. So NPAs, it says, reflected at 2.25 per cent. “However, during 2009-10 the gross NPA ratio showed an increase to 2.39 per cent”. This was the beginning of the crisis that has become too grave now.
Since 2012, when Rajan became Chief Economic Advisor to September 5, 2016, he was in a commanding situation. It is difficult to understand why he did not take steps to stem the NPAs or rising lending or suggest stringent measures.
In 2007, Rajan was made Chairman of a 12-member committee in the Planning Commission. The committee submitted a report: “Hundred plus steps”. Soon after this Prime Minister Manmohan Singh nominated him as his Economic Advisor in 2008. He could have done a favour if he had cautioned the government in 2007 itself. Instead, what he suggested was to privatise the public sector banks. This had raised a storm in both political and economic circles and the proposal was put off.
But it raises another question — whether the process of making the banks sick was a part of a plan or not. The banking sector now is in a deep crisis. It is all people’s deposits. Pessimism has gripped the sector. Deposits are coming down. Recapitalisation has a limit.
Rajan was told by Dr Joshi’s Estimates Committee to state the facts. What he has done appears to be a process of not stating the reality and lacks clarity too. The way forward that a person like him should have suggested is still not clear.
The nation knows that the banking sector, custodian of people’s money, is in deep crisis. It has to come out of the grim situation so that the world’s engine of growth continues to purr and puff. Banks have to be nursed back to health. The diagnosis is known, the treatment has to be decided. One definite step is to have strong regulation — not political, less of rules, paper work and allow the banks to function business like without a dictat. Sooner the better! – INFA