Public Sector Banks on a Write-off Spree...

Thu, 28 Jul Pre-Open

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Government-owned banks have been under pressure lately. These banks continue to struggle on asset quality concerns. The asset quality review, which was conducted by the Reserve Bank of India last year forced these banks to disclose their bad loans and to being work on setting up a recovery mechanism for these loans. The majority of these stressed loans are from the Infrastructure, Power, and Textile sectors. Since some of these sectors have witnessed a slowdown and rising costs having wreaked havoc on their profits, the question is why did the banks act as a mute spectator on witnessing this deteriorating performance of their borrowers and in fact continued to lend them even more money?

By continuing to lend to these borrowers, the banks pushed the proverbial can down the road. The time of reckoning though has come for these banks and questions are being asked about their lending practices. The country's public sector banks in the fiscal year of 2016 have written off bad loans of Rs 595 billion. These banks had earlier written off almost Rs 1,140 billion of bad loans during the fiscal year 2002-05. This means that the banks failed to recover these amounts of money lent from the borrowers. In just one-year public sector banks wrote off more than half of the combined loan amount they did in last three years.

Why should this bother you as a taxpayer or a depositor? Banks have to take a huge provisioning hit when they loan goes bad. Remember this adversely impacts the bank's profitability. While the government banks survive due to annual capital infusion from the government, the money that is infused is the taxpayer's money! Why should the taxpayer bear the brunt for the negligent lending standards of the banks? For a long period of time, the state-run banks have been an epitome of inefficiency and have displayed their vulnerability to political pressures. The total gross non-performing assets of Indian banks are uncomfortably high. The banks are also grappling with willful defaulters; these are defaulters who have the capacity to pay, yet they have not paid their dues.

The RBI having forced the banks hand to have a clear road-map to clean up their balance sheets has even set up a deadline for banks to complete this cleanup by March 2017. The pain, however, is far from over. There is a rising trend in Special Mention Accounts 2 category (SMA-2). These are accounts wherein the repayment is overdue for 60 days. This data means that there are more loans which could turn bad in the near future.

While bad loans are part and parcel of any lending business, there is an increasing need to monitor the lending practices of the public sector banks. The government has to firmly convey the important message regarding these Capital infusions, aka Bailouts cannot continue forever.

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