The Sheriff of Mint Street has let the carnivore out of the cage. On January 17, he sent a message to RBI employees - No one wants to go after the rich and well-connected wrong-doer, which means they get away with even more. If we are to have strong sustainable growth, this culture of impunity should stop. By talking about writing down bad loans, Governor Raghuram Rajan is arguably the first RBI boss not to hide the elephants and camels under the carpet. Instead he has released a wild animal and that animal is now busy devouring bank balance sheets. Wait... too many animals in the mix. Never mind with the animal analogy, at the very kernel of India's banking system are stressed assets and their true nature and the extent of the malaise. Corporate lenders are being bruised almost daily, their results emblematic of the quagmire they find themselves in. SBI's market capitalisation on Thursday was Rs 117, 375 crore, Kotak Mahindra Rs 115,294 crore and HDFC Bank was double at Rs 246, 559 crore. Relatively, it is the retail banks which have done slightly better and survived this brutal catechism. Of course, Thursday saw complete capitulation and carnage. What is worrisome are the net losses and provisioning for non performing assets across more or less the entire catalogue of public sector banks. Opacity is out and transparency is in. With Rajan arguing aggressively for greater openness and acceptance of what is now truly malignant, banks one by one have also shown courage to accept the truth. Resulting in even private sector banks like Axis and ICICI looking into the mirror and acknowledging the ugly warts.
Following the RBI directive towards recognising the necessary impaired accounts, Axis Bank for instance has recognised all the impaired accounts in the current quarter itself which most analysts maintain is a key positive. Provisioning thereon, in addition to credit costs towards standard assets, accounts under 5:25 refinancing route / SDRs / restructuring and the need to re-build contingency buffers will keep loan loss provisioning elevated over FY16-18E. Ergo, analysts have revised their estimates accordingly. Right now the bank along with the rest of the rat pack is sinking. Stressed asset recognition on lower side to consensus; provisioning, though is set to remain high: Q3’16 slippage at Rs20.8bn included mere ~Rs10bn of loans as impaired following RBI directive. However, with exposures to highly leveraged corporates at 8% of loans, 25% of restructuring portfolio slipping into NPA (with 2-year lag), Rs61bn of loans under 5:25 route (including Rs25bn of pipeline), few accounts under SDR and elevated slippages for Q4’16, analysts have revised their slippages estimates higher.
The cumulative sins of random disbursal of loans through 2007-08 have come back to haunt us leading to fear and loathing. The sickening culture of cronyism and patronisation which saw corporates being granted easy access to loans and free flowing agri credit between 2008-2009 when the the absolute credit growth target for the public sector banks for 2008-09 which set a target at Rs 3,59,139 Crore (growth of 19.8%) was enhanced to Rs 4,41,917 Cr in January 2009. Furthermore, RBI followed up by allowing liberal restructuring of loans (low interest and tenure as well as other term and conditions) leading to a state of disrepair. Bank of India’s bad debts have crossed 112% level followed by Bank of Baroda with 82% in a year on September 2015. Similarly, Bank of Maharashtra's NPAs stands at 84 percent growth rate in same period. Chickens have come home to roost. By March end, 2015 the ratio of stressed assets of PSU banks to their total loans were at a record high of 13.5 per cent, rising further to about 15 per cent in June. For private sector banks and foreign banks the numbers were 4.4 per cent and 3.6 per cent respectively. The actual size of the impaired assets of PSU banks is now reportedly in excess of Rs. 7 lakh crore, taking into account the securities receipts (SR) received on sale of NPAs and bonds of power distribution companies. What was essentially triggered off by the farm loan waiver of 2008 over a eight year journey has assumed catastrophic proportions. Between the farm loan waiver, Forest Rights Act and MNREGA, Congress swept back to power with 206 seats in 2009. What it did not factor in was the utter emasculation of the public sector banking apparatus.
By calling of the charade of 'extending and pretending,' Rajan has partly belled the cat. Which will lead to relentless bloodletting in the short and medium term. Stressed assets in the banking system is likely to rise to 12.5 per cent by the next fiscal against an estimated 12 per cent in the current financial year, India Ratings has prognosticated. Further it averred that about one-third of the corporate sector borrowing from banks to be stressed - totalling to 21 per cent of bank credit, of which about half has been recognised currently as impaired in the books - NPLs and restructured. "Indian banks may need up to Rs 1 trillion over and above the Basel III capital requirements to manage the concentration risks arising out of their exposures to highly levered and large stressed corporates," the report said. Of this, public sector banks will need Rs 93,000 crore, which is equivalent to an equity write-down of about 1.7 per cent of the bank's risk weighted assets, and represent the loan haircut that banks may face to revive the financial viability of distressed accounts.
I would like to quote from a recent Macquarie report - "Indian Banks: Apocalypse Now", where the brokerage said "it is getting murkier, uglier and indecipherable. India’s banking system is in a precarious state. We believe the government, regulators and policymakers are underestimating the magnitude of stress in the banking system. Macquarie added that banks' balance sheets have become very opaque as lenders try to "camouflage" by resorting to 5:25 refinancing rule, restructuring, SDR, NPL sales and ever-greening, and thus looking at reported earnings has become futile in many cases. "Close to 16-18 per cent of the loans which are currently shown as standard (normal or restructured) remain potential sources of stress," it said. It ended by giving a number which is scary - capital requirements for PSU banks to meet Basel-III norms by FY19 are huge, at $33 billion or Rs 2.24 crore. This is much higher than the earlier estimate of 1.8 lakh crore assumed by the Finance Ministry.
Recapitalising these banks is not going to be easy for the simple reason that the government doesn't have free capital available to pump prime these banks. The next best thing is to bolster the balance sheets by merging the weaker banks with stronger ones. The problem is that currently it is difficult to sift through the weak and strong PSU banks since all of them are being tarred by the same NPA brush. The time to step in is now, but the finance ministry as always is waiting for the water to engulf it completely.
The author is a senior journalist and commentator based in New Delhi.
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