NPA conundrum: Huge losses in banks like PNB and BoI; show PSBs on verge of crisis

Punjab National Bank has reported the highest quarterly loss in the banking history—of R5,300 crore for the quarter ended March. Bank of India (BoI), the country’s third-largest state-run lender by assets, posted a net loss of R6,089 crore for fiscal 2016—the highest by a public sector bank (PSB).

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Punjab National Bank has reported the highest quarterly loss in the banking history—of Rs 5,300 crore for the quarter ended March. Bank of India (BoI), the country’s third-largest state-run lender by assets, posted a net loss of Rs 6,089 crore for fiscal 2016—the highest by a public sector bank (PSB). For the fourth quarter ended March 31, its loss swelled to Rs 3,587 crore from Rs 56 crore a year earlier.

Including BoI, 12 state-run banks posted combined losses of R20,643 crore in the March quarter, due to a surge in provisions for bad debt after a clean-up ordered by RBI. UCO Bank reported a net loss of Rs 1,497 crore, followed by Indian Overseas Bank (Rs 1,425 crore), Central Bank of India (Rs 837 crore) and Dena Bank (Rs 663 crore), in the fourth quarter of 2015-16. The cumulative loss of 20 state-run lenders stood at Rs 14,000 crore during Q4.

While the minister of state for finance, Jayant Sinha, said in a written reply to the Rajya Sabha that the Indian banking sector is staring at NPAs of Rs 1.63 lakh crore, data from 16 banks shows that write-offs by SBI and BoI stand at over Rs 83,000 crore in the last 10 years, and for 14 other PSBs the figure is Rs 44,850 crore. SBI has written off Rs 41,640 crore as NPAs in the last 10 years. Since 2011, SBI’s write-off has jumped 15 times; in 2014-15, its NPAs were more than 14 other PSBs.

While SBI wrote off Rs 41,640 crore between FY06 and FY15, it recovered only Rs 11,566 crore during the period—recoveries are 27% of total bad loans. In the last three years, when SBI’s write-off jumped four times, it classified over Rs 30,231 crore as NPAs, whereas recoveries were Rs 4,927 crore (16%). BoI wrote off Rs 41,361 crore since 2009, and 14 other banks wrote off Rs 8,883 crore. IDBI’s write-off jumped five times since 2011 when it declared R319 crore as NPAs, whereas in 2014-15, it wrote off Rs 1,609 crore.

Data shows that recovery process is sluggish, and in some cases has slumped to as low as 13% of the total write-offs for a year. Banks have continued rolling over troubled loans or restructured them to make terms favourable to borrowers. They are on the verge of a crisis due to high NPAs, which constitute over 90% of the total bad loans of the industry.

Banks’ dismal performance speaks volumes about their lackadaisical approach, which allowed the likes of liquor baron Vijay Mallya to raise huge loans, divert the money to foreign shores and finally quit the country without clearing dues. Instead of introspection, bankers are blaming the economic slowdown for the failure of the companies to repay taxpayers’ money. Even the government is saying that bankers can’t be held accountable. Finance minister Arun Jaitley, in an interview to a national daily, partly blamed media, Parliamentarians and courts for weakening banks.

Though RBI has given a deadline of March 2017 for banks to clean up their balance sheets, its role in regulating the banking sector has come under scrutiny by the SC. Last month, it slammed RBI for not being “bothered about the mounting bad corporate debt.” It reminded RBI of its duty as a watchdog and wanted it to make public the “mind boggling” outstanding bad loans, even if it didn’t want to name defaulters who owe over Rs 500 crore to banks. It told RBI that “if a bank does not manage funds prudently and there is no hope of recovery, what do you do? Aren’t you supposed to keep vigil and take action if banks violate guidelines or are found in the wrong?”

However, RBI wriggled out by saying it does not monitor daily functioning of banks. RBI counsel Jaideep Gupta cited provisions in the RBI Act and the Credit Information Companies (Regulation) Act, 2005, which mandate confidentiality of such information. “The disclosure of aggregate figure may have an impact on the economy,” he told the court.

Banks oppose any demand for making the list of big borrowers public, contending they have a “fiduciary relationship” with clients and “no public purpose” will be served by disclosures.

A Standing Committee on finance report tabled in Parliament early this year expressed unhappiness with handling of bad loans by RBI. It said high NPAs raise questions about “credibility of the mechanism” to deal with the issue that threatens the stability of the banking system. It said RBI hasn’t “quite succeeded” in enforcing its rules on bad loans.

There is a sense of uncertainty on the extent of troubles in the sector. While bankers hope a gradual upturn in the economy will help ease the burden of bad loans in the new financial year, analysts feel banks need a comprehensive approach to NPA management that includes not just curative but also preventive actions across the credit life-cycle.

Legal experts are against ever-greening of loans. “Banks need to be more conservative in granting loans to sectors that have been found to be NPA contributors. The credit sanctioning process has to go beyond the current process of analysing financial statements and promoters’ history. Banks must have a mechanism in place that ensures defaulters are kept out of system unless they clear their previous liabilities before wanting fresh loans,” said SC lawyer Abhishek Mishra.

According to analysts at Accenture Finance & Risk Services, a comprehensive early warning framework that includes identifying the right customer segment, understanding data landscape, formulating early warning triggers and creating a risk mitigation plan can help substantially reduce banks’ NPAs.

Said another lawyer Rahul Gupta, “The new Bankruptcy Code will ensure time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of serial defaulters.”

While the onus to keep PSBs stay afloat also lies with the government, a combined rational and effective approach may improve the sector.

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