Calm down! Banks are bleeding but there is cash to get through

Achieving social equity through banks has been tried before by Indira Gandhi. It is being tried once again. Forty four per cent Indians lacked bank accounts in 2011. This is because you would have to possess a PAN card and a verified residential address, besides an introducer to open an account. Besides, the minimum balance requirement of Rs 10,000 in private banks and Rs 1,000 in public sector banks was a deterrent. Also, as 20 per cent of Indians owned 80 per cent of its real estate assets, bank loans given against property could be availed by only a fifth of the Indian population.

The Aadhaar initiative of the UPA was largely ready by 2014, needing some last minute changes before its launch. Once that was done, an authentic biometric identification of people without permanent residential addresses or PAN cards was possible. The Jan Dhan scheme introduced in 2014 by the Modi government brought in over 250 million Indians into the banking system with zero balance bank accounts. As per PwC, the unbanked population had dropped to 18 per cent by 2015. But the banks, especially those in the public sector, were in a bad shape with a host of problems from high bad debts, to low cash flow.

Demonetisation led to huge cash flows

The identification through Aadhaar helped in directing subsidies to bank accounts, including the cashless Jan Dhan accounts. But that was a trickle flow that was not enough to alter the cash flow positions of banks significantly. Then came the sudden move of demonetisation in November 2016, which was politically a successful move. The UP election was largely fought around the debate of demonetisation and was convincingly won by the BJP. Incidentally,   demonetisation helped pump up the cash reserves of Indian banks. With 86 per cent of the currency going back to the banks, it ensured that the bank chests were brimming with liquid cash by March 2017.    

Even the Jan Dhan bank accounts saw buoyancy. By March 2017, Rs 650 billion (Rs 65,000 crore) was pumped into 300 million Jan Dhan bank accounts with less than 25 per cent having zero balance. Though this exercise was largely aided by cash mules, it ensured a high cash flow through the banking system. Now, the next big challenge was how to reduce the excess cash in the banks and reducing interest liability. The banks had surplus cash to lend, but were also saddled with huge bad debts.

Bank NPAs could soon cross 10 trillion

Former RBI Governor Raghuram Rajan had for quite some time asked Indian banks to report their bad debts and deal with stressed assets problem, which had been growing since the past decade. But the banks were reluctant to acknowledge the problem. The standard procedure was to reschedule and refinance the defaulters with a few new stipulations. When risk to the lenders increased, it was eventually shared by a consortium of banks. In some cases, the RBI in 2012 permitted External Commercial Borrowings (ECB loans) of $430 million to refinance and pay off expensive domestic rupee loans of Rs 20,000 crore. So debts kept increasing.

In 2015, Governor Rajan was finally able to crack the whip with the new Government in power. The Asset Quality Review guidelines were initiated in 2015 that asked banks to review and report its stressed assets position. It opened up a Pandora’s box as the RBI started monitoring the numbers reported and insisting on compliance. In March 2015, the total NPA of the banking sector was shown as 2.78 trillion (2.78 lakh crore). With proper reporting, the NPAs which were buried for decades, came tumbling out and then tripled by the next two years.

By 2017, when the Insolvency and Bankruptcy Code came into force, the NPAs had crossed  Rs 9 trillion (9 lakh crore). Twelve large loan defaulters were identified, accounting for 25 per cent of the total NPA’s. The big defaulters like  Bhushan Steel, Lanco Power and ABG Shipyard were put on the block. Though stressed assets are being diluted, the NPAs are rising and are expected to cross Rs 10 trillion (10 lakh crore). Despite the high write-offs and plunging profits, there is enough liquidity in the banking system to see through this phase.  

Need to make lending safe

Meanwhile, banks are finding new lenders outside India Inc. Indira Gandhi tried to provide banking services to all, with nationalisation of banks against the global trend of privatisation. The new banking initiative under the Mudra scheme that is being furnished without collaterals is one such attempt. More than 115 million (1.15 crore) people of the economically weaker section have been sanctioned loans up to Rs 10 lakh each. This amounts to disbursements of around Rs 3 trillion (3 lakh crore).

Whereas this helps convert the humongous cash in the bank vaults to business and reach new clients, it needs to be dealt with utmost due diligence and not as handouts during an election year. The credit rating system of borrowers needs to be automatically linked and updated every quarter with bank borrowings and repayments under ‘Digital India’. It is a rigour that needs to be incorporated in the system automatically with strict supervision. Otherwise banks, which are now shedding off the current burden of bad debt and stressed assets, will incur a new and longer defaulter list.

The writer is an author and senior journalist. Views are personal.