Who is paying the price for rising NPAs ?

A recent paper by officials of the RBI shows that gross Non Performing Assets (NPAs) rose from 3.4 percent of bank loans in March 2013 to 4.7 percent in March 2015 and further to 9.9 percent in March 2017. The figures for March 2018 are not yet out, but the few pointers that are available all suggest the number will only go up further. The first of these is the quarterly reports put out by the banks for the three-month period ending December 2017. At that point, the combined NPA figure was a whopping 8.4 lakh crore, with about 6.1 lakh crore from the industrial sector. Again, the 20 banks that have announced their quarterly results for January-March this year have seen NPAs rising from 7.2 percent a year ago to 8.3 percent and their combined NPAs were 32.7 percent higher than a year ago. Clearly, the problem is only worsening.

Lest you think that NPAs are only about categorizing some loans as doubtful and no money is actually lost by the banks in the process, here are some sobering figures. RBI data presented to Parliament by the government shows that in the five years from 2012-13 to 2016-17, a whopping Rs 2.5 lakh crore was written off by the banks, the overwhelming majority of this being loans taken by industrial houses. Of this sum, Rs 61,640 crore was written off in 2012-13 and 2013-14, which were UPA years. In the first three years of the NDA government, 2014-15 to 2016-17, the total sum written off was Rs 1,88,286 crore. What is worse, the figure has risen each year, from Rs 49,018 in 2014-15 to Rs 57,585 crore in 2015-16 and Rs 81,683 crore in 2016-17.  The State Bank of India alone has recorded losses of over Rs 10,000 crore in the last two quarters, i.e., from October 2017 to March 2018. Punjab National Bank recorded losses of over Rs 13,000 crore in a single quarter, from January to March this year. That’s over Rs 20,000 crore from just two public sector banks in less than half a year.

Finance Minister Arun Jaitley tried to pin the blame for this on the UPA, saying it was a problem his government had inherited. It may well have inherited some bad loans. But far from cracking down on defaulters, the government chose to help the corporates through loan refinancing and restructuring schemes, often not on sound financial reasoning. Of course, some corporates are especially favoured. For instance, two power companies controlled by the Adanis were extended loan refinance worth Rs 15,000 crore by public sector banks. This was done when earnings before tax of both these companies were not even enough to cover the interest cost on the loans they have taken. In this sweetheart deal, the previous defaulted loans were replaced with new loans and the loan repayment date was extended by one more decade. Similarly, Reliance Gas Transport Infrastructure Ltd (RGTIL), a corporate entity controlled by Mukesh Ambani, was given a loan refinance of Rs 4,500 crores and an extension of payment period by more than a decade.

These NPAs affect people in two ways. First, if banks have to assume that a fairly large chunk of their loans will have to be written off, they have to increase what they call the spread between the interest they pay on their deposits and the interest they charge on loans. So our deposits earn less interest and pay more interest on things like home loans. Second, when public sector banks start get stressed due to these bad loans, the government has to bail them out by injecting fresh capital. While the public sector banks need to be saved in the interest of our people, the route of ‘recaptialisation’ without making any attempt to bring the errant companies to book and recovering the losses to the banking system from them is really a device to bail out big business. That is, our money being used effectively to subsidise defaulting corporates including the Vijay Mallyas and Nirav Modis.

The other most dangerous development is the proposed Financial Resolution and Deposit Insurance (FRDI) Bill that would legitimise the transfer of the burden of risk on banking operations to the depositors. If Banks fail the money deposited by ordinary people could be used by the banks to bail them out.

But who is paying the price for this colossal mismanagement of the economy? Are India’s powerful businessmen the ones getting ruined by this? As the story of bank loans turning bad reveals only too clearly, for the most part they aren’t – it is the people who are getting robbed and ruined.