Bharat’s banking sector is now getting into vicious cycle of NPA-led dip in bank profitability- weaker bank balance sheets- decline in incremental bank credit. This is not an overnight phenomenon and it is a legacy inherited by the current government from the previous regime in 2014.
Bank credit to infrastructure sector
INR (in Bn)
Bank funding to infrastructure sector grew by 43.41 percent (CAGR) over the last thirteen years during 1999-2000 to 2012-2013.
% of infrastructure finance to gross bank credit
Gross NPAs and restructured standard advances to total infrastructure sector advances
|Rs. 121.90 Bn
Between March 2008 and March 2013 alone, banks’ exposure to infrastructure has grown by more than three times. Infrastructure advances as percentage of total advances grew from 11.8% in March, 2010 to 15.62% in September, 2014.
Gross Non Performing Assets of Public sector Banks
Amount (INR in Trillion)
Nearly 11.6% of the total NPAs of the banks are from the infrastructure sector. Adding to the problems, stalled and delayed mega infrastructure projects have resulted in huge cost escalation. Restructuring of such stalled and delayed mega infra projects and subsequent classification of NPAs has resulted in a piquant situation where such projects could be taken forward only on infusion of additional funds or speeding up the approvals/clearances by various agencies/ govt. departments, but the banks’ inability to lend additional funds due to such advances becoming NPAs and not much of progress in approvals/clearances by government agencies has complicated the problem further.
Cost Escalation in central infrastructure projects (projects costing Rs.1500 million and above)
|Total No. of Projects
|No. of stalled projects
|Original cost (INR)
|Revised estimates (INR)
|Net increase in cost (INR)
Percentage of upward revision
|30th August, 2014
|31st December, 2014
|31 st December, 2016
|31 st March, 2017
Land acquisition, forest clearance, supply of equipment, funds constraints, Maoist incursion, legal cases and law and order situation are the major reasons behind the delay in execution of these mega projects.
Apart from the above bankers face the following major issues in financing large infra projects:-
- A significant part of large infra projects undertaken are consortium lending with appraisals being carried out by professional merchant bankers with built-in conflict of interest (since they are paid by the borrowers).
- Public-private partnership (PPP) projects are undertaken in project financing mode with high leverage.
- PPP contracts of long term duration are complex in nature due to involvement of multiple stakeholders.
- Excessive reliance on DPRs (Detailed Project Reports)/ TEV (Technical Viability) Reports of third parties, who don’t have any accountability or regulatory frame work to rein in.
- Shortage of skilled manpower in the banks to do technical evaluation of complex infra projects.
Composition of NPAs
Large borrowers accounted for 54.8 per cent of gross advances and 85.6 per cent of GNPAs. Top 100 large borrowers accounted for 15.2 per cent of gross advances and 26 per cent of GNPAs of SCBs. Quantum of NPAs is more in Corporate loans followed by MSME and agriculture whereas the number of NPA accounts is more for agriculture followed by MSME and corporate loans.
The current system of PMG (Project Monitoring Group) under Cabinet Secretariat monitoring the central infrastructure projects costing Rs.150 Crs and above on time and cost overruns has just proved to be a mere statistical exercise without being effective as the data of cost escalation in central infrastructure projects mentioned above reveals.
PMG will be meaningful only when all the stake holders of the infrastructure projects (i.e., representatives of contractors, NHAI and concerned Govt., agencies, banks and FIs in the case of road projects) are made members in this group and actively involved so that the reasons for costs and time overruns are identified at periodical intervals and necessary steps are taken for elimination of the bottlenecks by the concerned stake holders who are responsible for the same.
Joint inspection by banks, implementing agencies, exchange of information and Periodical review of these accounts by banks/FIs in line with the timing of PMG meetings are very much needed to streamline the things.
Issues in credit monitoring and recovery administration in the system involving banks, borrowers, policy makers, regulators and legal system have contributed to the present state of affairs in Bharat’s banking.
In fact, RBI has been sounding warning bells since 2014 onwards.
“The results of the systemic risk survey conducted by the Reserve Bank in April 2014 show that the banks’ asset quality still remains under the ‘high’ risk category, along with domestic fiscal situation and global and domestic growth and inflation, among others.” (Financial Stability Report, 2014)
Bharat’s financial system is bank dominated – banks’ share at 63 per cent of total assets of the financial system, is followed by insurance companies at 19 per cent, Non-Banking Financial Institutions at 8 per cent, Mutual Funds at 6 per cent and Provident and Pension Funds at 4 per cent, of the total assets of the financial system. Excessive lending to mega infra projects that involve large quantum of funds and longer tenure has resulted in high leverage and ALM (Asset Liability Mismatch) for the commercial banks. Time has come to review the concept of universal banking and take policy measures to address the above issues.
The Reserve Bank of India initiated a Scheme of Prompt Corrective Action (PCA) in 2002 in respect of banks which hit certain regulatory trigger points in terms of capital to risk weighted assets ratio (CRAR), net non-performing assets (NNPA), and return on assets (RoA). The scheme was revised in April 2017.
Under the Revised PCA framework, apart from the capital, asset quality and profitability, leverage is being monitored additionally. Currently 11 banks are under PCA (Dena Bank, Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce and Bank of Maharashtra).
While the regulators and the government have initiated remedial and corrective measures to address the issues in banking sector sequencing, timing of these measures and swift handling of the operational issues are three major areas where there have been gaps.
RBI could have initiated much earlier the remedial and corrective measures to strengthen the Internal Control and risk management systems in the banks which have been the weak link leading to dilution in the quality of advances and major frauds like PNB buyers credit episode.
IBC (Insolvency and Bankruptcy Code) was passed by the parliament in 2016. Demonetisation was announced in November, 2016 banning Rs.500 and Rs.1000 notes. GST Act was passed in July, 2017. FRDI Bill was hastily introduced in the parliament in August, 2017 and again hastily withdrawn the same in August, 2018. The government should have followed a strategic approach and the IBC should have been passed in 2015 and GST Act at least by 2016.
Simultaneously digital payments should have been given a push by bringing a Digital Payments Act to address the issues of cyber crimes, digital payment charges and by building a robust infrastructure to expand the digital payments across the country. Then the government could have had a rethinking on launching demonetization which could have been avoided altogether.
The demonetization in 2016 had virtually paralyzed the banking system including RBI for close to one year as they were made busy in taking back the banned Rs.500 and Rs.1000 notes and printing and circulating the new notes into the system. Though there is lack of data the fact remains that the informal and unorganized sectors of the country’s economy have suffered major setbacks due to demonetization leading to disruption of several units and rise in unemployment in the short run.
Government’s hasty introduction and withdrawal of FRDI Bill in the parliament has led to reputation risk of PSBs and shift in the deposits from the banks to other channels of investment. The government is now caught in a situation where the resolution of bad loans of the banks has just started giving the results and GST mechanism is slowly stabilizing and both these measures still have few more years to go before they start giving significant results.
Whereas the government would like the RBI to relax the lending norms so that there can be more flow of credit to MSME sector and relax the NPA guidelines to power sector which is facing a crisis. Having initiated tougher PCA guidelines in April, 2017 the RBI would obviously not like to tinker with the same since the banking regulator is looking for a long term solution but not for short term results.
On a review of the developments that have taken place in Bharat’s banking sector since 2014, though one has to accept the fact that bad loans are the legacy of the past, both the regulators and the government could have done much better in initiating the remedial and corrective measures by properly sequencing and timing of those measures in a more cohesive manner.
For the regulator PCA (Prompt Corrective Action) is the need of the hour whereas for the government Politically Correct Action (PCA) is the need of the hour which requires greater flow of credit to MSME and relaxation in the NPA norms for power sector. Let us hope that both the regulator and the government will learn their lessons, reconcile and move forward in the best interests of the country’s economy.
(Featured Image only for representational purpose.)
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