A gathering cloud

In the discussion surrounding the announcement of the government’s recapitalisation programme for its public sector banks (PSBs), one aspect of the larger sectoral problem appears to have not been given sufficient attention. While PSBs now have some hope that they will be able to move forward from the heavy weight of non-performing assets (NPAs) that had been dragging down their operations, a problem of similar nature, though as yet of smaller proportions, has become visible in the hitherto healthy privately-controlled banking sector. Several leading private sector banks have seen big jumps in the level of their bad loans in their recently declared results for the quarter ended September 2017.

ICICI Bank, while it has seen a reduction in NPAs since the quarter ended June, nevertheless continues to have NPAs at a worrying level — with a gross NPA ratio of 7.9 per cent, as compared to around 6.1 per cent in the year-ago quarter. It declared a net profit of Rs 2,058 crore, a drop of 34 per cent year-on-year. Other banks, too, have seen similar issues. Axis Bank reported that NPAs had increased 24 per cent over the previous quarter. HDFC Bank has been a far more cautious lender than most, but even it saw its NPAs increase — although they are still at the comfortable level of 1.24 per cent.

The key question is: Is the narrative surrounding the recapitalisation of PSBs, which stresses the poor due diligence and lending practices of these banks, missing an important point? For one, the Reserve Bank of India has expressed its dissatisfaction with certain private sector banks when an analysis of banks’ books by the regulator threw up some divergences between actual and provisioned-for NPAs in some cases. According to the central bank, Axis Bank and YES Bank have grossly underreported bad loans. While HDFC Bank is in discussions with the regulator, which has asked it to classify a contentious loan as a non-performing asset, the central bank’s audit on such divergences is still not out for ICICI Bank.

However, the question goes beyond poor book-keeping. If even some private sector banks are showing signs of stress, perhaps the additional question of distress in the corporate sector should be seen as having some explanatory power. While HDFC Bank has claimed that most of its slippage in NPAs has come from its agricultural loan portfolio, other banks, such as ICICI Bank, are struggling with underperforming assets in sectors such as iron and steel. Last year, Axis Bank estimated that 15 per cent of its corporate advances were struggling. Banks that have lent to core sectors such as power are uncertain about how they will recover their money. The bankruptcy and resolution process will hopefully begin to show results before the end of the year, but its effectiveness has not yet been proven.

The larger point surely must be that India’s corporate sector, in general, has not covered itself in glory. It has shown that it is simply a poor judge of risk. Regardless of whether it is a public or a private bank that is on the hook, many companies have demonstrated that they have borrowed more than is prudent. Part of the problem has been the general inability to enforce contracts — which means that renegotiation and recalibration of already-done deals is very much part of the business plans of some corporate houses. The growing NPA problem should cause a relook at the norms surrounding contract enforcement in India.