Tag: Public Sector Banks | Page 2

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.

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.

26 February, 2018

The Nirav Modi Fraud Tells Us That the Business of Govt Should Not Be Business

Nirav_Modi

The government of India owns 21 public sector banks. We have been advocating over the years that the government doesn’t really need to own so many banks. It just adds to the economic mess.

In the aftermath of the Nirav Modi fraud, many other economists, businessmen and analysts, have been making this rather obvious point.

The finance minister Arun Jaitley ruled this out recently, when he said: “This (privatisation) involves a large political consensus. Also, that involves an amendment to the law (Banking Regulation Act). My impression is that Indian political opinion may not find favour with this idea itself. It’s a very challenging decision.”

The total bad loans of public sector banks as on September 30, 2017, were at Rs 6,89,806 crore. The bad loans rate was at 13.5% i.e. of every Rs 100 lent by public sector banks, Rs 13.5 had not been repaid by the borrowers.

The Nirav Modi fraud is pegged at $1.8 billion (or around Rs 11,400 crore). If the total Rs 11,400 crore is assumed as a bad loan, then the total bad loans of public sector banks will be a little over Rs 7,00,000 crore. Hence, the fraud is simply a drop in the ocean of bad loans of public sector banks.

This means that the problem is somewhere else. If we look at data as of March 31, 2017, the total bad loans of public sector banks were at Rs 6,19,265 crore. Of this around 69% or Rs 4,24,434 crore, was on account of lending to corporates. And this is where the problem lies.

One Nirav Modi and his companies are not the problem, it is the corporate sector as a whole which has been abusing the public sector banks in the country.

Of course, with such a huge amount of bad loans, the government has to constantly keep infusing capital into the public sector banks, in order to keep them going.

The hope is that with the government infusing money into these banks, they will gradually get back to full-fledged lending and in the process help the economy. Of course, there is nothing wrong with this hope but the economic incentive it creates for politicians, is totally different.

As Thomas Sowell writes in Basic Economics—A Common Sense Guide to the Economy: “Nothing is easier than to have good intentions but, without an understanding of how an economy works, good intentions can lead to counterproductive, or even disastrous, consequences for a whole nation. Many, if not most, economic disasters have been a result of policies intended to be beneficial—and these disasters could often have been avoided if those who originated and supported such policies had understood economics… [There is a] crucial importance of making a distinction between intentions and consequences. Economic policies need to be analysed in terms of the incentives they create, rather than the hopes that inspired them.”

Long story short—while implementing an economic policy, we need to be able to differentiate between what the policy hopes to achieve and the economic incentives it creates. It is ultimately, the economic incentives that are created which will decide how people react to the policy, making it effective or ineffective.

A major reason why politicians love the idea of owning public sector banks (or public sector enterprises for that matter), is that it allows them to bestow favours on their favourite industrialists (read crony capitalists).

In terms of public sector banks, this means forcing them to give out loans to businessmen, who either are not in a position or do not have any intention of repaying the loan. Hence, the government may be recapitalising banks with the hope of letting them operate at their full strength, but the real incentive for the politicians is somewhere else.

The only way of breaking this nexus between businessmen and politicians, is to privatise a bulk of the banking sector in India. If that is not possible due to regulatory hurdles (as Jaitley talked about), a bulk of public sector banks should not be lending to corporates. There activities should be limited to raising money as deposits and lending them out in the form of retail loans.

This “narrow banking” model is likely to work better simply because with a bulk of public sector banks not being allowed to give corporate loans, the politicians will not be in a position to direct lending towards their favourite corporates. With this taken out of the equation, public sector banks might just about manage to operate much more efficiently.

Also, with politicians having one lesser issue to deal with, they might just pay more attention to the other major problems that the country faces and get their heads together on tackling them.

The trouble is that the decision to get public sector banks out of lending to corporates, is to be made by politicians. And as we saw in the column, they do not have an incentive to do anything like that. How do you deal with a problem like that?

The column originally appeared on Equitymaster on Equitymaster on Feb 26, 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.