1. Editorial: Need more anaesthesia

Editorial: Need more anaesthesia

RBI helping banks, not making them comatose

By: | Updated: February 19, 2016 2:19 AM
rbi

RBI helping banks, not making them comatose (Reuters)

HDFC chairman Deepak Parekh has voiced the concerns of many, especially PSU bankers, when he said, at a lecture on Wednesday, that while he agreed with RBI on recognition of NPAs being the anaesthetic needed for a deep surgery, “too much of anaesthesia can also result in a patient becoming comatose!”. Given how shares of PSU banks have collapsed after their NPAs shot up around R90,000 crore in just the December quarter—thanks to RBI directives on classifying more accounts as NPAs—the argument is that the central bank may be bringing a banking crisis to India. Why not do it more gradually—after all, NPAs were significantly higher in the mid-1990s—and, in any case, as growth picks up, many stressed assets will get okay and there will be buyers willing to take over stressed projects? Apart from the possibility that many of the assets are too gold-plated to be viable, there is no certainty that growth will recover fast enough for the self-healing to take place. From 5.6% in FY13, GDP growth rose to 6.6% in FY14, 7.2% in FY15 and is projected at 7.6% in FY16—yet, gross NPAs of PSU banks rose from 3.8% of advances in the March 2013 quarter to 6.2% in September 2015 and 8.1% in the December quarter; growth is clearly not a panacea. Instead, with interest costs piling up, the longer the delays, the more unviable the projects are becoming.

Indeed, it would be instructive to read the latest Credit Suisse update which says that just 10-20% of loans to steel firms are recognised as being impaired by most banks—that is despite the collapse in both steel prices and demand-growth—and that majority of the debt in their House of Debt sample has still not been classified as either an NPA or as a restructured asset. As compared to RBI’s estimate of NPAs plus restructured loans totaling around R8 lakh crore in September 2015, the debt in the CS sample was R7.3 lakh crore and most of the groups had an interest cover—EBIT-to-interest—of under one. It is not certain how much of the CS debt will finally become NPA, but given the circumstances, it would appear that more ‘anaesthesia’ may not be a bad idea though, if this is not accompanied by a definite plan to fix things, banks will get more incapacitated than they already are.

Where Parekh is certainly right is in his observations that the government has to allow not just more private sector talent to come in to run PSU banks—what has been done so far is minuscule—and prospective new investors bringing in capital have to be given a role in running banks; Parekh doesn’t say so directly, but privatisation has to be part of the solution. Sadly, going by what the finance minister said the other day, the government has a closed mind on this.

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  1. D
    D. V.
    Feb 19, 2016 at 3:32 pm
    The central point is that the much deteriorated patient has been stretchered into the Operation Theatre after much damage was done by ignoring the early symptoms of the ailment, leading to a supra major surgery where the Risks were sought to be indemnified by belated RBI mandate to accept the critical position of the patient. Cronyism and directed lending tore into the vitals of the PSU banks rendering them a sickly, living creatures. The duration and extent of anaesthesia is fraught with contingent Risks and a dicey, calculated risk was undertaken, as there was no option left but to make a hard choice ! As they say, if Surgery is essential/imperative, so is the Knife !
    Reply
    1. K
      kiran
      Feb 19, 2016 at 6:28 am
      Solution is Govt. holding going below 50% at least and allowing private investments with RBI oversight, paving the way for market-related talent induction and autonomy from the clutches of govt.
      Reply

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