Expert Speak India Matters
Published on Oct 16, 2018
Why is Govt losing face trying to clean up the banking mess? 

Nobody denies that the banking crisis is a legacy issue, that needed resolution since long. Both the public sector and the private sector banks and financial institutions had exposure to bad debts that was well beyond the safe limits of operation. It is known that the stressed asset identification by banks under the supervision of the RBI will ultimately yield results. That the bankruptcy act will ultimately allow these stressed assets to be taken over by healthy companies. That the Rs 10 lakh crore (Rs ten trillion) bad debt is a temporary phenomenon and will be resolved sooner or later. Yet the Government is taking the flak as bad debts balloon, and bank mergers and takeovers start happening. Why?

There is evidence to show that the situation had deteriorated particularly after 2009 when bankers and the regulators chose to ignore warning signs at the behest of the powers to be. But it is also true that despite the change of government in 2014, the cleaning up did not start as expected. The warning signals were ignored and the situation came to a crisis point after 2017. The escape of Vijay Mallya and Nirav Modi in the  last two years and the buildup of stressed assets have compounded the problem. The perception is building, close to the elections, that the government has not acted in time. The feeling that the government has been reactive and not proactive is widespread. The government needs to beef up its act in three areas.

Personal accountability must be fixed in each case

Even after the scandals of Kingfisher Airlines and Air India enfolded in the aviation industry, nobody has made an attempt to bring to task the folks guilty of decision making. Ajit Singh was the Civil Aviation Minister and P Chidambaram was the Finance Minister when most of the indiscretions occurred. In Mallya’s case, no action was taken despite the bouncing of cheques given to public sector oil companies and the Airport Authority of India. The total outstanding to these public sector companies exceeded Rs 1000 crore in March 2009. Instead of freezing his accounts, Kingfisher was given more money to operate by the public sector banks whose outstanding then was around Rs 5000 crore. When DGCA Bharat Bhushan put Kingfisher on notice, he was sacked instead. But there is no enquiry despite the scam!

Mallya kept on operating in India for two more years. The banks declared their cumulative dues and a Look Out Circular LOC issued in 2015, six months before he fled to Britain in March 2016. While the UPA  helped Mallya to fleece the banks, the current government did not surprisingly investigate the men and women who supported Mallya. The Air India scam was much bigger in size and more controversial. Air India was an ailing airline  with accumulated losses of Rs 20,230 crores and outstanding debt of Rs 67,520 crores. The CAG had already indicted the lapse in procedures while buying the 27 Dreamliner Aircraft calling it  “ a buy that was forced.” Despite this, the UPA in April 2012 financed a Rs 30,000 crore bailout package that was used to buy the planes making the national airliner sick beyond recovery. But no action has been taken by the present government against the politicians and bureaucrats despite the smoking gun pointed out by the CAG. It is also necessary to identify and black list the officials, bankers and bureaucrats involved in the two scandals and ensure that they do not play a role in current day decision making.

Despite the brouhaha raised by the Mallya escape, Nirav Modi and Mehul Choksi fled a year later. In Mallya’s case, no action was taken to identify the bad apples in the system and take action against them either at the political level or at the administration level. In Choksi’s case, some mid-level bank officials have been arrested. But nobody has looked at the finance ministry big wigs who would have been deeply involved in the scam of this magnitude. Importantly, no heads have rolled in the finance ministry or the enforcement agencies though LOC should have been issued by agencies for all such loan defaulters who could escape the law. Clearly, the leniency to punish the corrupt is not a healthy sign, and voters and investors are not convinced of a real cleanup.

Similar is the case of the other 12 big loan defaulters against whom the bankruptcy act has been invoked and another 28 defaulters whose names have been sent by the regulator for action under the IBC. All the managing directors and owners of the aforesaid firms who are involved in recovery litigation should be issued a Look Out Circular and barred from leaving the country. Swedish telecom supplier Ericsson has already dragged Anil Ambani owned firms RCom, Reliance Infratel and Reliance Telecom to NCLT which has debts of Rs 46,000 crore. Ericsson raised the flag against Anil Ambani whose company has reportedly defaulted on payment of over Rs 1000 crore and asked the Supreme Court to ensure that Anil Ambani does not flee the country.

Bank recapitalisation needs to be hastened

A 2017 report of  Fitch International stated that the Government of India will need around $65 billion  ( Rs 4.3 lakh crore or Rs 4.3 Trillion ) for recapitalisation of banks by March 2019. In Oct 2017,  the Government of India had promised Rs 2.11 lakh crore ( Rs 2.11 Trillion ) in bank recapitalisation. Of this, Rs 1.35 lakh crore was planned through bonds, Rs 0.58 lakh crore through equity and 0.18 lakh crore through budgetary support. But only Rs 88,139 crore was released last year, to 20 public sector banks for recapitalisation. In January 2018, the government announced that this Rs 2.11 lakh crore recapitalisation would be spread over two years.

To stop the panic in the stock markets and boost the banking sector, the government needs to step up the bank recapitalisation programme. At least a third of the NPAs written off by the banking sector must be pumped back into the system quickly. There is no liquidity crunch in the banking system as of now. So there is no need to panic. But this being an election year, corrective steps need to be taken early to boost confidence. The stock markets are becoming volatile with the crude oil price rise and the Rupee slump. The government stepped in quickly to take over the IL&FS which was very positive. Now they need to recapitalise the banks double quick.

A structured road map for bank mergers needs to be drawn

Whereas the short term measures would need catching those who conspired with the defaulters and recapitalisation of the banks, the long term solution would be planning  out a merger programme of weak banks and strong banks. Already the merger of the SBI and associated banks and the takeover of the IDBI by the LIC has taken place. The merger of Bank of Baroda (big bank) has been announced with Dena Bank (weak bank )  and Vijaya Bank (strong bank). But much more needs to be done to revive the banking sector.

The current situation is ideal to do the bank mergers. The bank unions are more worried about the survival of the public sector banks. At this stage they are unlikely to oppose any merger moves that they would normally. Also the 20 odd public sector banks need restructuring. They need to be refocused more with a balance of retail and infrastructure goals. Most of the writeoffs and NPAs have happened in the infrastructure sector with metals, cement, and the road sector. So the public sector banks need to be revitalised and repositioned and the quicker it is done the better.

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Sandip Sen

Sandip Sen

Sandip Sen is an author and journalist writing on a vast range of subjects from economy to technology environment to lifestyle. He is a regular ...

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