The Indian Fiscal Cliff
of Non-Performing Assets
India’s public sector nationalised banks, often directed by
the Government to lend money to commercially unviable borrowers, are burdened
by huge gross non-performing assets (GNPA). This, along with the huge
borrowings of the Government, and the ever-widening fiscal deficit, are
seriously eroding the strength of the economy as a whole.
The alarming rise in GNPA was made evident by Minister of
State for Finance Mr. Namo Narain Meena in a written reply to a question in the
Rajya Sabha recently. The Minister’s reply sought to take refuge in the reduced
percentages in the 6 month period till September 2012, in comparison to the
full year figures for the previous financial year till 31st March
2012, but taken on a pro-rata basis. This might amount to sleight-of-hand at
the half-yearly mark, using incomplete figures.
The fact is, the
total quantum of lending in the top PSU and Scheduled Commercial Banks has
increased this financial year, and the NPA too have risen alongside in absolute
terms. This, even though there has been a decrease, or apparent slowing in the
pace of increase of GNPA in percentage terms, over the previous fiscal, at
least up to the half-yearly mark.
The total GNPA quantum nevertheless spread over all Public Sector
Banks (PSB) and Scheduled Commercial Banks (SCB) till 30 September 2012 stood
at Rs. 62,602.57 crores, but this is declared only on a provisional basis. The
amount for the last fiscal full year was Rs. 56, 332.30 crores, so yes, the
GNPA has increased at a much slower pace, based on the face value of the
figures released by the Minister.
There are also multiple directives from the Reserve Bank of
India the Minister cites, towards tightening loan recovery policies and
procedures, which nevertheless are silent on the credit risk assessments and
collaterals taken before such loans
were given.
The effort of the RBI to smarten up recovery processes,
procedures and time-frames are not very likely to yield substantial results
once the loans have already gone bad. The horses may well have bolted, having
found the paddock gates open. The RBI may be seized of this possibility too,
because it has also touched on the matter of cleaning up the books by effecting
write-offs of some of these GNPAs on a “prudential” basis.
Another worrisome fact, less so in the case of PSB and SCB
of course, because they can be propped up by Government executive action,
broadly unlike the private sector, is the probability of the GNPA outstripping the capitalisation of
many of these lending institutions. And this includes the substantial State
Bank of India Group.
The Government, including the RBI, may well want to have the
PSB and SCB to cultivate a better portfolio of assets, but this laudable
objective is often in conflict with politically inspired lending that tends to
be more interested in pleasing and catering to target groups. The ultimate risk
however in such a scenario is to the fiscal health of the entire system.
A country without fiscal discipline cannot create the right
environment for investment and growth. The question is, are these GNPA figures
accurate, or optimistic? Are the
percentages and absolute quantums declining truly, or is this a consequence of
redefinition of what constitutes a GNPA? Our long history of Soviet-style
jugglery with statistics does not necessarily inspire confidence. Nor does the
Leftist tendency to spend money that the country does not have by either
increasing borrowings or printing more money, or both. When a banking system
flirts with bankruptcy, inflation may be the least of our worries.
(593 words)
1st
December 2012
Gautam Mukherjee
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