Tag: Bad Loans | Page 3

3 April, 2018

India’s Banking is Getting Privatised Without the Govt

Indian_ten_rupee_coin_(2008_Reverse)
“Should public sector banks be privatised?” is a question that is being thoroughly debated these days. Arguments have been offered from both sides.

Those against the idea of public sector banks being privatised like to say that private sector banks also make bad lending decisions and end up with bad loans. Of course, that is true. In the business of banking, some loans are bound to go bad. A bad loan is essentially a loan on which the repayment has not been made for 90 days or more.

Nevertheless, the more important point is what proportion of the loans have gone bad. As of March 31, 2017, the total bad loans of public sector banks stood at Rs 6,41,057 crore. In comparison, the total bad loans of private sector banks stood at Rs 73,842 crore.
Hence, the bad loans of private sector banks amounted to around 11.5% of bad loans of public sector banks. But just looking at bad loans in isolation isn’t really the correct way.
We also need to look at the total advances or loans of these banks.

As of March 31, 2017, the total advances of public sector banks stood at Rs 55,57,232 crore. The total advances of private sector banks stood at Rs 22,19,563 crore, or around 40% of advances of public sector banks.

If the private sector banks were doing as badly as public sector banks on the bad loans front, there bad loans should also have been around 40% of the total bad loans of public sector banks. But that as we saw is clearly not the case. The bad loans of private sector banks are at 11.5% of the bad loans of public sector banks.

This basically means that the private sector banks operate much more efficiently than public sector banks. Hence, the argument that public sector banks should not be privatised because private sector banks also accumulate bad loans, doesn’t really hold.

But that isn’t the major point that I wanted to make in this column. What people who suggest that public sector banks should not be privatised do not realise is that the banking sector in India is getting privatised on its own, even though the government continues to own 21 public sector banks. Take a look at Table 1.

Table 1:

Total advances As on March 31	Public Sector Banks	Private Sector Banks	Ratio (Total advances by private sector banks to total advances by public sector banks) (in %)
2012	38,77,307.31	9,66,402.95	24.92%
2013	44,72,844.65	11,43,248.58	25.56%
2014	51,01,053.95	13,42,934.61	26.33%
2015	54,76,249.54	15,84,311.86	28.93%
2016	55,93,576.78	19,39,339.43	34.67%
2017	55,57,231.63	22,19,563.01	39.94%

Source: Author calculations based on data from Indian Banks’ Association

Now what does Table 1 tell us? As on March 31, 2012, the total advances of private sector banks were around a fourth of the total advances of public sector banks. By March 31, 2017, this ratio had increased to 40%.

This basically means that as public sector banks go slow on lending because of their bad loans, the total loans given out by private sector banks are growing at a much faster pace. Hence, as far as the overall banking sector is concerned, it is getting privatised, irrespective of what the experts and the government think about privatising public sector banks.

In fact, the situation is not very different from other sectors which the government has opened up for private companies over the years. Take a look at what happened to the airlines sector. Air India and Indian Airlines (before they were merged) had 100% of the market (along with Vayudoot, another government owned entity). Now Air India (in which the erstwhile Indian Airlines has been merged) has 13.8% of the market share. This has benefitted the consumers tremendously.

Similar stories of privatisation, without the government privatising public sector enterprises, have played out in the telecom and pharmaceutical sectors, respectively, and even in education, to some extent.

The telecom sector had two players BSNL and MTNL. Over the years, the market share of these two government owned companies, has come down dramatically, while the government continues to own them.

Over the years, various ministers have referred to public sector enterprises as family jewels. The trouble is that in sector after sector, these family jewels have lost their lustre and a tremendous amount of value has been destroyed.

Along similar lines, public sector banks have reached a stage where it will be difficult to find buyers for many of these banks, even if the government makes a decision to privatize them (which in the first place seems very difficult).

The 1997 Committee on Banking Sector Reforms (better known as the second Narasimham Committee) had recommended that the government reduce its holdings in PSBs to 33 per cent and, in the process, give increased autonomy to these banks. The Committee had also recommended no further recapitalisation of public sector banks by the government. But that is not how things have eventually turned out.

And more than two decades later, now we have reached a stage where most of the public sector banks are as dead as a dodo.

The column was originally published on Firstpost on April 2, 2018.

26 March, 2018

Corporates Responsible for More Than 80% of Bad Loans of Public Sector Banks

One of the points that we have been making regularly in our columns and Letters is that public sector banks should not be lending to corporates. And now we have found more data to back it.

In a written answer to a question raised in the Lok Sabha, the government provided data regarding the accumulated bad loans across different areas of lending. Bad loans are basically loans on which repayment has been due for 90 days or more.

Take a look at Table 1.

Table 1:

As on March 31, 2017	Industry	Agriculture and Allied Activities	Services	Retail Loans	Other loans
Total NPAs	4,70,084	57,021	84,686	23,795	5,470

Source: Unstarred Question No: 4614, March 23, 2018

It is clear from the above table that lending to industry forms a bulk of the bad loans of public sector banks. The total bad loans of public sector banks as on March 31, 2017, had stood at Rs 6,41,057 crore.

This basically means that lending to industry forms 73.3% of the total bad loans of public sector banks. Or to put it a little differently, lending to industry forms nearly three-fourths of the bad loans of public sector banks. Take a look at Table 2, which basically lists out the proportion of bad loans that have accumulated for public sector banks, from different forms of lending.

Table 2:

Sector (As on March 31, 2018)	Proportion of bad loans in each sector
Industry	73.33%
Agriculture and Allied Activities	8.89%
Services	13.21%
Retail Loans	3.71%

Source: Author calculations on data taken from Unstarred Question No: 4614, March 23, 2018 and Centre for Monitoring Indian Economy

Table 2 tells us very clearly that the industry and services sector are together responsible for 86.5% of the accumulated bad loans of public sector banks. This basically means that Indian corporates (because while lending to the services sector also, banks are lending to corporates) are responsible for more than 80% of the bad loans of public sector banks.

Of course, one can’t just look at bad loans in isolation of the total loans given out by public sector banks in each of the different areas. Take a look at Table 3, which lists the proportion of the overall loans, given to each sector.

Table 3:

Sector (As on March 31, 2017)	Proportion of loans
Industry	37.78%
Agriculture and Allied Activities	13.99%
Services	25.40%
Retail Loans	22.83%

Source: Centre for Monitoring Indian Economy.

Table 3 makes for a very interesting reading. The total lending to industry by public sector banks forms around 37.8% of the total lending. On the other hand, as we can see from Table 2, the lending to industry is responsible for 73.3% of bad loans. This clearly tells us where the problem with Indian banking is.

Now, let’s take a look at Table 4, which basically lists the bad loans of different sectors as a proportion of total lending carried out to that sector.

Table 4:

Sector	Total Bad loans (in Rs crore)	Total loans	Bad loans (in %)
Industry	4,70,084	26,80,025.00	17.54%
Agriculture and Allied Activities	57,021	9,92,387.00	5.75%
Services	84,686	18,02,243.00	4.70%
Retail Loans	23,795	16,20,034.00	1.47%

Source: Author calculations on data taken from Unstarred Question No: 4614, March 23, 2018 and Centre for Monitoring Indian Economy

What does Table 4 tell us? For every Rs 100 that Indian public sector banks have lent to industry, Rs 17.5 has not been repaid. For retail loans, the bad loans rate is 1.47%. This shows the difference between lending to industry and lending to individuals.

Finally, let’s take a look at Table 5, which lists the retail NPAs and the industry NPAs of different banks as on December 31, 2017.

Table 5:

Name of the bank	Retail NPA in%	Industry NPA in %
State Bank of India	1.3	21.9
Bank of India	2.6	27.6
Syndicate Bank	4	16
Bank of Baroda	3.4	16
IDBI Bank	1.4	39.4
Central Bank of India	4.6	23.5
Bank of Maharashtra	4.4	15.3
Andhra Bank	1.8	29.1

Source: Investor/Analyst presentations of banks.

One look at Table 5 makes it clear that public sector banks do a fairly decent job of lending to the retail sector. The retail bad loans are all less than 5% in every case, whereas the corporate NPAs are higher than 15%.

There are multiple reasons for this. There is no pressure from politicians to lend to crony capitalists when it comes to retail lending. The managers can carry out proper due diligence while giving the loan.

There is very little incentive for the manager to crack a deal on the side, with a retail borrower (unlike is the case with a loan given to industry) and give a loan, where he shouldn’t be giving one. This is primarily because the average loan amount is much smaller in case of a retail loan than a loan to industry, and any dishonesty while giving a retail loan is really not worth the risk.

In case of default, the legal system can be unleashed on to the retail borrower, unlike a loan given to industry, which has access to the best lawyers. A retail defaulter is unlikely to leave the country, like has been the case with several corporate defaulters, in the recent past. The asset against which the loan has been given to a retail borrower can be easily repossessed in case of default, unlike is the case with a loan given to industry.

In case of a home loan, which forms a little over 50% of all the retail loans given out by banks, the value of the home against which the loan has been given tends to much more than the outstanding loan at any point of time. This is primarily because banks don’t fund 100% of the value of the home, getting the borrower to put in at least 20% as a down payment. Over and above this, most homes in India when they are bought also involve the payment of a black component and this adds to the margin of safety of the bank.

In comparison, many loans given to industry are gold plated where the borrower essentially fudges the cost of the project, takes a higher loan than he should and then tunnels money out from the project, thus having very little of his equity in the project. In some cases, the value of the asset against which the loan has been taken tends to be lower than the value of the loan.

Narrow banking is the solution. Most of the public sector banks in India, should not be lending to corporates.

It will ensure that Indian public sector banks do not end up in the mess that they currently are in, anytime in the near future. The trouble is the politicians aren’t going to like it because it is the crony capitalists who fund their elections at the end of the day. And where do crony capitalists get their money from?

The other problem is that if banks do not lend for long term projects, what is the alternative arrangement? The corporate bond market in India barely exists. Pension funds, provident funds and insurance companies, prefer to invest in government bonds, and do not really have the expertise to invest in long term corporate projects. The project finance institutions of yore do not exist, having turned themselves into retail banks.

Having said that, the first and the foremost function of a bank is to ensure the safety of the money of the depositors.

To conclude, all these factors leave the public sector banks in India, in an extremely vulnerable space. As far as the government (or should I say governments) is concerned, all it has done is to throw money at the problem, which is never enough to solve any problem.

Some thinking is necessary as well.

The column originally appeared on Equitymaster on March 26, 2018.

21 March, 2018

Let’s Move Beyond Nirav Modi, Bad Loans Are Bleeding India

Nirav_Modi
“Nirav Modi, Nirav Modi, where have you been?” is a question that the bankers at the Punjab National Bank (PNB), must be asking themselves these days.

Media reports suggest that Nirav Modi is in New York, and has no plans of coming back to India. His operational fraud is expected to cost PNB Rs 12,646 crore. PNB is the second largest public sector bank in the country and as of December 31, 2017, had accumulated bad loans of Rs 57,519 crore. A bad loan is a loan which hasn’t been repaid for a period of 90 days or more.

The one good thing that has happened since Nirav Modi’s fraud came to light is the relentless focus of the mainstream media on the operations of India’s government owned public sector banks.

The total bad loans of the public sector banks as of December 31, 2017, stood at Rs 7,77,280 crore. This forms 86.4% of the total bad loans of scheduled commercial banks (i.e. public sector banks + private sector banks + foreign banks). This basically means that the total bad loans of scheduled commercial banks as of December 31, 2017, would be around Rs 9,00,000 crore.

Hence, Nirav Modi’s fraud of Rs 12,646 crore is just a drop in this ocean of bad loans. But his fraud has put a face to the sad state of affairs that prevails at public sector banks and has thus elicited interest from the mainstream media and the common public.

Before Nirav Modi came long, the bad loans of public sector banks was just an issue which with the business press was concerned about. Now even the TV channels in different languages are having discussions around the issue.

Nevertheless, the fundamental issue at the heart of the bad loans of India’s public sector banks continues to remain unaddressed. Who is responsible for this mess and what should be done about it?

The government released some interesting data earlier this month in an answer to a question raised in the Lok Sabha. As per data from the Reserve Bank of India (RBI), the total bad loans from the “industry-large” category of loans, as of December 31, 2017, stood at Rs 5,27,876 crore. This was for scheduled commercial banks as a whole. The RBI defines a large borrower as a borrower with whom the bank has an exposure of Rs 5 crore or more.

Such borrowers are essentially responsible for a bulk of the bad loans of the banks in India. They are responsible for around 59% of the bad loans (Rs 5,27,876 crore expressed as a percentage of Rs 9,00,000 crore) of scheduled commercial banks. Bank loans to large industrial borrowers formed 59% of the bad loans, even though the total lending by banks to such borrowers formed only around 30 per cent of the total loans given by banks.

Public sector banks accounted for Rs 4,64,253 crore or 88% of bad loans in this.
In fact, the much criticised public sector banks do a pretty decent job of lending to the retail sector. Take a look at Table 1, which basically compares proportion of retail loans which turn bad with proportion of loans to corporates which turn bad, for a few public sector banks.
Table 1:

Name of the bank	Retail bad loans ( in %)	Corporate bad loans (in %)
State Bank of India	1.3	21.9
Bank of India	2.6	27.6
Syndicate Bank	4	16
Bank of Baroda	3.4	16
IDBI Bank	1.4	39.4
Central Bank of India	4.6	23.5
Bank of Maharashtra	4.4	15.3
Andhra Bank	1.8	29.1
Source: Investor/Analyst presentations of banks.

Table 1 clearly shows that corporate bad loans are much higher than retail bad loans. The question is why? The answer perhaps lies in what economists call regulatory capture. As Noble Prize winning French economist Jean Tirole writes in his book Economics for the Common Good: “The state often fails. There are many reasons for these failures. Regulatory capture is one of them. We are well aware of the friendships and mutual support that create complicity between a public body and those who are supposed to be regulating it.”

How does one interpret this in the Indian case? While it would be totally unfair to suggest that the RBI, which regulates banks in India, is pally with corporates, but it would be totally fair to say that Indian politicians are very pally with Indian corporates. This is where the problem for public sector banks in India lies.

While giving out retail loans, the managers running public sector banks, can make right lending decisions, the same cannot be said when they carry out corporate lending, given the political pressure that prevails on many occasions.

In this scenario, it is worth asking whether all the 21 public sector banks in India should actually carry out corporate lending and put public deposits at risk, over and over again? This is a discussion that we should now be having as a nation and the mainstream media is where this discussion should be happening.

The column originally appeared on The Quint on March 22, 2018

28 February, 2018

Let’s Say Thank You to Nirav Modi

Nirav_Modi

As of September 30, 2017, the total bad loans of Indian public sector banks stood at Rs 6,89,806 crore. A bad loan is a loan which hasn’t been repaid for a period of 90 days or more.

Nirav Modi’s fraud, as of today, will add another $2 billion (around Rs 13,000 crore assuming $1=Rs 65) to the overall bad loans of the public sector banks, assuming that the banks are unable to recover any amount. This doesn’t seem to be the case given that the government has moved quickly and attached many assets of Nirav Modi.
Long story short, Nirav Modi’s fraud isn’t going to add much to the overall bad loans of public sector banks. A percentage or two more, isn’t going to change the situation, which is grave, much. Given this, we have been wondering, why has Nirav Modi got Indians so worked up.

Over the last few days, everyone we have interacted with, from Kaali Peeli drivers, to other cab drivers, to guest house attendants, to journalism school students and faculty, to people who edit the different publications that we write for and even the guy who collects trash in the building where we live, have had a thing or two to say about Nirav Modi.

But Nirav Modi’s fraud of around Rs 13,000 crore is small change when compared to the bad loans of public sector banks of Rs 6,89,806 crore. Why haven’t we seen anyone talk about the overall bad loans of public sector banks, up until now? The defaults on corporate loans make up for around 69% of overall bad loans of public sector banks. Why hasn’t this disturbed people enough, up until now?

Or to put it simply, why have people now started talking about the fact that when they default an EMI on a retail loan, the bank comes after them with great speed and purpose, whereas businessmen like Nirav Modi are allowed to commit a huge fraud, and leave the country comfortably.

Why are businessmen defaulting on loans treated differently by banks than individuals defaulting on etail loans?

Why are there only sick companies and no sick businessmen?

What is it that explains this dichotomy? As Nobel Prize winning economist Jean Tirole writes in Economics for the Common Good: “Psychologists have identified our tendency to attach more importance to people whose faces we know than to other anonymous people.”

Take the case of the distressing picture of a three-year-old Syrian child, who was found dead on a Turkish beach in 2015. This forced Europe to pay attention to the refugees coming in from Syria.

As Tirole writes: “It had much more impact on Europeans’ awareness than the statistics about thousands of migrants who had already drowned in the Mediterranean.”

Or as Joseph Stalin, the Soviet dictator, once said: “The death of one man is a tragedy. The death of million men is a statistic.”

This phenomenon works in advertising as well. As Tirole writes: “An advertising campaign against drunk driving has a more powerful effect when it shows a passenger flying through a windshield than when it announces the annual number of victims (a statistic that provides, however, far more information about the consequences of drunk driving).”

As far as India goes, let’s take the case of the Bhopal Gas Tragedy which happened in December 1984. A bulk of English speaking and reading India woke up to the tragedy only once the India Today magazine put the picture of an unknown child being buried, in the aftermath of the tragedy, on its cover.

An issue really becomes an issue in the minds of people, once they can visualise it in terms of an individual. A good example of this in the Indian case is that of the anti-gutka campaign that was run a few years back, and which featured an individual named Mukesh Harane, who died of oral cancer in October 2009.

He was addicted to gutka. After his death he became the face of the anti-tobacco message which was delivered to the people of this country through an audio-visual clip (shown regularly in cinema halls) as well as a print campaign. It showed Mukesh talking about the ill-effects of eating gutka, with a feeding pipe going into his nose.

It was a fairly disturbing video, but it really drove home, the ill-effects of chewing gutka.

Along similar lines, like Mukesh Harane, Nirav Modi has become the poster boy for corporate India looting the public sector banks, over the years. And given this, while the Rs 6,89,806 crore of bad loans did not make much of an impression in the minds of people (in fact very people would even be aware of the largeness of this number), Nirav Modi’s Rs 13,000 crore fraud, clearly has.

And nothing works better on the government than public pressure. The government has reacted quickly and seized the assets of Nirav Modi. It is also trying to push in long due reforms. Today’s edition of The Times of India reports that the government is planning a new regulator, called National Financial Reporting Authority(NFRA), to regulate the chartered accountants and auditors.

It will take away the review and disciplinary functions the Institute of Chartered Accountants of India (ICAI). This is something which has been long due and only the Nirav Modi fraud has pushed the government towards considering this reform, seriously. The ICAI is a part of the deep state that runs India, and clearly needs to be reined in.

Further, banks have been directed to check for the possibility of fraud on all bad loans of Rs 50 crore or more. Many corporate defaults run into hundreds if not thousands of crore. The question is where did all this money that was raised to fund projects, go? Over the years, there has been a lot of talk about corporates overstating the cost of projects, borrowing a larger amount and then tunnelling money out of the project.

This is something that should have been investigated as soon as the defaults had started to happen. But, again, nothing was done on this front. Now thanks to Nirav Modi, this exercise has been initiated.

Above all this, the Nirav Modi fraud, raised enough stink, leading to the mass media writing, reporting and discussing about the mess that prevails in India’s public sector banks. A large section of the population came to know about the mess, only because of the Nirav Modi fraud. This wasn’t happening earlier. And this is very important in a democracy.

This has also led to analysts asking the government, as to why does it need to own 21 public sector banks. Or for that matter, should public sector banks be lending to corporates at all? Some sort of debate has been initiated on this front.

And for all this, in a very screwed up sort of way, we need to thank Nirav Modi.
The icing on the cake will be, if we are able to get Nirav Modi back to India, and the law of the land is allowed to catch up with him.

The column was originally published in Equitymaster on February 28, 2018.

21 February, 2018

Why the Nirav Modi fraud is much more than just a fraud

Nirav_Modi
During the course of the last one week, the hottest news-story in India has been that of a jeweller named Nirav Modi, allegedly defrauding one of India’s largest government owned banks, the Punjab National Bank (PNB).

PNB is India’s second largest government owned bank (with assets of around Rs 7,203 billion ($111.7 billion, assuming $1 = Rs 64.5) as on March 31, 2017). The total amount of the fraud has been estimated to be at $1.8 billion (or around Rs 114 billion). News report suggest that Modi (no relation to the current prime minister of India Narendra Modi) fled the country in early January. His immediate family also left India, during the course of the month.

Nirav Modi is believed to be holed up in a luxury hotel in New York and was last seen in Davos, as a part of a business delegation which got a picture clicked with the prime minister Narendra Modi. Before Nirav Modi, Vijay Mallya, another businessman, who hasn’t repaid loans worth Rs 90 billion ($1.4 billion) due to Indian banks, fled the country.

The latest fraud basically involves PNB guaranteeing loans issued to Nirav Modi by issuing a letter of undertaking (LOU). Every time a loan became due, Nirav Modi got PNB to open another LOU equivalent to the loan amount plus the interest that was due on it. The money from the new LOU was used to pay off the loan and the interest due on the previous LOU. In the process, Modi never repaid the loan.

Currently, it is being suggested that he was helped in the process by two employees of PNB. That such a huge Ponzi scheme could be run without the top or the middle management of the bank knowing about it, is a little difficult to believe.

Thus, Modi managed to operate a Ponzi scheme, with money from the new LOU being used to pay off the previous one. Of course, like all Ponzi schemes, Nirav Modi’s scheme collapsed as well. And before the authorities came after him, he left the country, along with his family.

How does Nirav Modi’s fraud look in light of the other frauds that Indian banks face? In July 2017, the ministry of finance had shared some interesting data in this context.

Between the years 2012-2013 and 2016-2017, the banks in the country had seen a total number of 22,949 frauds, with total losses to banks amounting to Rs 698 billion ($10.8 billion). The average loss on a fraud thus amounted to Rs 30.4 million ($0.47 million). The interesting thing here is that of the 78 banks on the list, PNB faced the highest losses when it came to frauds. Over the five-year period, the bank faced 942 frauds with losses of Rs 90 billion ($1.4 billion). The losses amounted to around 12.9% of the total losses faced by the Indian banks due to frauds.

In fact, the average loss for PNB due to frauds stood at Rs 95.5 million ($1.48 million), which was three times the total average of Rs 30.4 million. Also, more than that, PNB faced more frauds than the State Bank of India, the country’s largest bank, with an asset base which is 4.6 times that of PNB.

What this tells us is that PNB’s control systems were in bad shape and hence, the bank got defrauded significantly more than the other banks did. Having said that, the average fraud at PNB between 2012-2013 and 2016-2017 had cost the bank Rs 95.5 million. In Nirav Modi’s case, the size of the fraud is around Rs 114 billion, which is much bigger than the size of the average fraud PNB has faced in the recent years.

What this tells us is that Nirav Modi’s case is more than a petty bank fraud. It is basically more along the lines of a large bank loan default; which many of India’s crony capitalists specialise in.

India’s government owned banks have been facing a huge pressure of corporate loan defaults over the last few years. As of September 2017, the bad loans ratio of these banks stood at 13.5%. This basically means that of every Rs 100 of loans given by these banks, Rs 13.5 had been defaulted on. A bad loan is a loan which hasn’t been repaid for a period of 90 days or more. The corporate default rate has been even higher.

Largely due to corporate loan defaults, the Indian banks have had to write off loans worth around Rs 2,500 billion ($38.8 billion) for the period of five years ending March 31, 2017. Nirav Modi’s bank fraud will only add to this.

To keep these banks going, the government of India has to regularly keep infusing capital in them. In fact, an estimate made by The Times of India suggests that the government has infused Rs 2,600 billion ($40.3 billion) in the banks that it owns, over the last 11 years. Every rupee that goes into these banks is taken away from more important areas like agriculture, education, health, defence etc.

The reason why many Indian businessmen blatantly default on loans is because they know that given India’s slow judicial system and their closeness to politicians, their chances of getting away with a loan default are very high. Nirav Modi is just a small part of this significant whole.

No wonder, former governor of the Reserve Bank of India, Raghuram Rajan, in a November 2014 speech had said that, India was a “country where we have many sick companies but no “sick” promoters”.

A slightly different version of this column appeared on BBC.com on February 20, 2018.