Throughout the difficult times of the ongoing economic crisis, Indian policy makers were talking about the robust banking sector that sustained the economy. Pranab Mukherjee when he was the Finance Minister used to boast about “a robust banking sector working under an efficient regulatory framework”, which other economies affected by the crisis didn’t have. But the scene doesn’t seem to be so good with “Rising bad debt hit[ting] PSU banks’ health”, on the one hand and financial sharks calling for trade in debts, on the other…
For several quarters analysts and bankers have warned about the deteriorating financial health of state-run banks. But policymakers have maintained that the worst was over, and that things would improve as the economy gathers steam. Drastic measures to nurse the banks to sound health are rarely talked about and the preference is for short-term steps to paper over the wounds.
“Indian banks are unlikely to reduce their problem loan ratios in 2015-16 but the new non-performing loans will probably decline,” Moody’s Investors Service said, based on findings of a poll.
For the banking sector as a whole the NPA situation is as bad as it was more than a decade ago when some radical steps – from one-time settlement to setting up asset reconstruction companies – were initiated. The global economic boom and the rapid growth in India too helped banks clean up their books. The economic slowdown and the failure of several projects to take off have once again hurt the asset quality in banks. The problem is more acute in public sector banks as they had to lend to companies and restructure loans after the 2008 financial crisis when the private sector virtually walked out of the market.
The rising levels of NPAs and capital constraints, along with low demand for loans, have forced these lenders to be very selecting in lending, something that may not augur very well for overall economic growth. “Public sector banks are facing multiple challenges. They have asset quality issues, require huge amount of capital and there are management issues. The huge recapitalization requirement has led to risk aversion and they are not growing their balance sheet significantly. Going forward we expect them to lose business because of this,” said an analyst at a leading brokerage.
Although bankers would tell you that they don’t have to deal with calls from the finance ministry any longer, the pressure of lending to various target groups and pushing government schemes is enormous. And, they have limited operational freedom. For instance, in April, HDFC Bank sold its loans of Rs 550 crore extended to Essar Steel at a 40% discount, something that an executive at a state-run bank can’t even think about. “The moment we do something there will be a CBI enquiry or a vigilance case,” said a banker.