With loan growth falling off a cliff and threatening to exacerbate the pains of a slowing economy, finance minister Nirmala Sitharaman has asked banks to get back to lending. Sitharaman wants them to make a connect with customers at branches, and not to blindly trust credit scores put out by rating agencies, but to use their discretion.
Bankers are unlikely to lend to firms that have poor ratings since they will almost certainly be hauled up if the loan goes bad, but they are reluctant to lend to even better-rated firms for fear there could be allegations of fraud. So, right now, they are playing it safe and parking their money in risk-free assets or government bonds. Senior bankers aren’t about to let their careers be jeopardised.
The treatment meted out to ex-PNB chief Usha Ananthasubramanian is still fresh in everyone’s minds. In August 2018, the government asked CBI to initiate action against her and dismissed her from service on her last day at work. While it was the Nirav Modi scam that involved the bank’s Brady Road branch that was her undoing, industry insiders point out that Ananthasubramanian really had no role. RBI wanted the core banking system of banks to be integrated with the Swift messaging network used by banks to securely send and receive information like money transfer instructions. At that time, the version of Finnacle that PNB used did not have an interface with Swift. Since PNB was, in any case, shifting to Finnacle 10 that had this Swift-interface, Ananthasubramanian didn’t try to look for a solution with the existing version of Finnacle; it would have cost more money and would have taken roughly the same time as the move to Finnacle 10. Also, quite amazingly, no questions have been raised about the roles played by previous heads at PNB, RBI’s inspection teams, or RBI’s directors on the board of PNB.
While the Supreme Court, in early February, set aside an NCLAT order that had called for freezing her assets, the fact is that no banker has spoken up to defend her. If a banker with no blemish in her record should be treated this way, surely other bankers will be hesitant to show any enthusiasm to lend in the manner the FM wants them to.
The Asset Quality Review (AQR) exercise, which began at the end of FY16, showed just how much rot there was in the system. Given that NPAs were a staggering Rs 10 lakh crore, are we to believe there were no instances of fraud, of evergreening to hide them? And, given the political pressure to give loans—top BJP leaders talked of ‘phone-banking’ of the UPA years—it wasn’t easy for bankers to resist pressures to lend to promoters who, often enough, didn’t bring enough collateral or enough equity; moreover, monitoring every loan was near impossible. And yet, it was Ananthasubramanian who was singled out.
In this environment, the government has tried to reassure bankers—by putting in a screening panel before investigative agencies can pursue bankers—that they will not be penalised if the loan goes bad for genuine reasons; indeed, the new system gives bankers a chance to defend their actions in a less hostile environment. But, various systems were put in place earlier as well, even if the new one looks more comprehensive. So, to show the new system works, why not refer cases like Ananthasubramanian’s to this panel and see how that works?
Apart from bankers not wanting to lend, the other issue—if banks loans are to rise—is about the ability of the borrowers to repay loans. The fact, however, is that it is businessmen who are unable to access loans—the smaller firms, mostly—that are in trouble. With the environment becoming tougher by the day, the need for working capital is very muted, but Indian companies and banks have mopped up $20 billion from the overseas markets in 2019; that means our lenders are losing out on good exposures, which could have help cushion some amount of risk-taking.
Since only stronger borrowers can tap the global markets, if we want entrepreneurship to flourish and small businesses to prosper, they must have access to formal credit from banks. But, for this to happen, we have to accept that several of the smaller enterprises may fail while many will also succeed.
Indeed, while the IBC is a good measure to ensure that wilful defaulters finally realise that they need to repay loans, there is a flip side that needs addressing. Smaller promoters are scared their businesses will end up in the National Company Law Tribunal (NCLT) even if they delay repayments for genuine reasons; so, rather than investing in new projects, they are leaving their money in a bank. Some thought needs to be given to the need to give banks more wiggle room instead of the straight-jacketed NCLT solution.
Also, if the government thinks banks and NBFCs will bounce back and start lending again, it is gravely mistaken. And, till financially-strapped private sector firms are in better shape, they aren’t going to be able to borrow again. To fix this, the government simply has to consider a TARP-like structure to take over bad assets; the reason why the US bounced back so quickly from the 2008 financial crisis was because of this, and, as it happens, all the investments made by the government in TARP were repaid—indeed, more than repaid.
There will, of course, be charges of moral hazard should a US-style TARP be considered, and some efforts will fail, but without some intervention and some risks, it doesn’t look like loan-demand can be revived. Wherever possible, government enterprises should step in to pick up a stake along with private equity players to revive a failing company. It is only when businesses are revived and new ones are set up—and jobs created—that consumption will get a boost; and, only that will revive credit demand.