Weekly Digest 6 September - 12 September 2016. “Unfolding Crisis – The Case of Rising NPAs and Sinking Public Accountability” Report Release and Panel Discussion on 14th September '16 at Constitution Club of India at 3 p.m.
Public Finance Public Accountability Collective (PFPAC) Weekly Digest (6 September - 12 September 2016)
This isn't the normal weekly digest that makes an entry in your inbox every Monday at 9 am (Well, almost every Monday). This isn't with an acerbic introduction slamming the left for its poverty of ideas and the right for its general-overall poverty, albeit in a sarcasm-coated jargon. This also isn't the one where the week-gone-by builds a platform to highlight the melodrama nationally or internationally, though subject matter for such is always in plenty floating the web. Finally, this also isn't the one where sections package stories laced in ruling dispensation's rhetoric to which vast swathes of citizenry exclaim in awe (/fulness, /someness) and carry on with their lives disbelieving in policy frameworks' inside-outsidedness, or upside-downsidedness. BUT, this is with an interest. PFPAC has shown perseverance and all along has been amply encouraged by all those who have believed in it. We and you have been fellow-travellers nudging our paths and ways to the maximum-possible convergence with scant divergences helping the initiative gather momentum. It is a result of this resilience that PFPAC is finally ready with its first publication on the topic of NPAs. Nishank, the lead author of the text has been supported by a number of fellow-travellers, whose name cannot be spelt out here, but gratitude is all encompassing. Along with the report launch, there is a panel discussion, the poster for which is inline here. We, hereby make a solemn request to everyone on this list for supporting us and those who are Delhi-based make it to the event. Media Collective has graciously agreed to videographer the proceedings and thereafter upload it.
Public Finance Public Accountability Collective (PFPAC)
cordially invites you to attend the formal release of its first publication
“Unfolding Crisis – The Case of Rising NPAs and Sinking Public Accountability”
Constitution Club of India in New Delhi at 3:00 p.m. on 14th September, 2016
Here is a Preface to the document penned by me and is the originally-written version (uncut) with minor edits being made in the booklet.
Non-performing assets, stressed assets, bad loans, bad debt and aligned terminologies reverberate the mediascape extrapolating the narratives, where camps are divided on culpability, but united in resolution before the issue of non-performing assets (NPAs) spiral out of control. Agreed that the menace of NPAs isn’t a sudden bolt out-of-nowhere, but has been building up over the years, the question that remains is the urgency of the moment. The urgency of the moment also delves into the urgency of resolution, and if a deep surgery needs to be carried out, as echoed by the RBI Governor, Raghuram Rajan, the compromise might lie in choking the lending flow of banks, in turn questioning the health of the banking system and economy generally. On the contrary, if a robust mechanism is too far in the coming, the time bomb would continue ticking and explode endangering financial health and economy. So, it is a situation where the walls are closing in, and escape lies in resolving through mechanisms initiated by the Government, the RBI and the banks. Why is it that an extrapolating narrative is gauged by the fact of the debate having entered the public discourse and slated for a life of its own?
The banking sector in the country is growing, though there are afflictions along the way, it still has come a long way. The issue of non-performing assets is a traction to smooth functioning. In order to realise its full growth potential, the sector needs a clean up act. The mechanisms dealt with subsequently in the document are yet to prove their veracity on expected lines, it nevertheless remains the case of synergistic approach to address NPAs, rather than isolationist tendencies at correctional measures. The statistics are alarming and attributed to defaulting borrowers, economic downturn, relentless lending based on collaterals and guarantees seldom assessed for risks, inadequate due diligence before and during transactions, and over-burdened tardy legal system prejudicing legal proceedings. Remedial mechanisms fall short of exhaustive measures leading to accumulation of NPAs. The rising figures of NPAs, of which the Public Sector Banks (PSBs) contribute a whopping majority is a testimony to the fact that PSBs are riddled with lending practices that tend to go unconstrained. Though, such a claim is hard to prove for various causes underlying NPAs, what is however accepted largely is the symptom extracting resources from within the banks. These could either be through provisioning, or through having such loans charged-off, or through evergreening, the last of which is resilience to come to terms with threatening reality of inflationary bad debts on one hand, and lack of perseverance in recovering such loans on other. Whatever be the reasons ascribed to, it is feeding into pressurising balance sheets and profits.
In the Indian context, banking sector reforms and financial sector reforms have generally been conceived to move ahead concomitantly. But, the real disconnect lies in delays associated with structural-institutional upgradation to match up to liberalising operational principles. This lag forces the banking sector reforms to trudge along slowly, and thus throwing the accelerated pace financial sector reforms out of gear. An obvious speed correction is the imperative, the lack of which is realising in banking crises, NPAs being one of them. Banking has undergone shifts in focus from the era of nationalisation to post-liberalised Indian economy and is placed presently to adhere to markets-driven approach with a focus on improving asset quality and improved risk management. While the Narasimhan Committee recommended prudential norms on income recognition, asset classification and provisioning, it is the tightening of these prudential norms that has lent greater visibility to NPAs. Now that the visibility is getting sharper, what actually prevents it from getting nipped in the bud is as much an issue of polity, bureaucracy and legality. Unless these three are coalesced together, their individual impediments would only add up compounded making manipulating the reasons for irresolution easy.
While cronyism and crony capitalism have gained common currency in financial circles, the terms, especially the latter is more of an interjection than a serious call for an injunction to political-corporate nexus. This is a crucial perspective, since merely blaming the corporates defaulting or deflecting loans elsewhere when they have the capacity to repay would be missing the woods for the trees. There is an underlying systemic fracture with banks unable to judiciously discern large quantum of lending in sectors where neither they nor corporates have proven track record of expertise. Add to that political manoeuvrability of pushing banks to release funds or restructure them for corporates, the notion of cronyism only gets fuelled sparking a spate of decisions unhealthy not only for the banking system, but even for the general health of the economy. The real question is what causes this manoeuvrability? A general sense is corporates influencing polity to influence banks on such decisions in their favour . There is a legitimacy to this claim considering governmental influence on boards of public sector banks, which could be politically appropriated for vested interests, a soft sort of arm twisting.
Most of the concerns are dealt with in the subsequent pages backed with data from reliable sources, I take this as an opportunity to deliberate on three of them needing further justification, albeit briefly, the BASEL-III norms, corporate vulnerabilities post the 2008 global financial crisis, and Large Exposure Framework (LEF).
Though, the document does not deal with BASEL-III explicitly, it is imperative to highlight it through this preface as a possible narrative to address NPAs in future, and capturing the imagination of people. The Basel Banking Accords are norms issued by the Basel Committee on Banking Supervision (BCBS), formed under the auspices of the Bank of International Settlements (BIS), located in Basel, Switzerland. The committee formulates guidelines and makes recommendations on best practices in the banking industry. The Basel Accords, which govern capital adequacy norms of the banking sector, aim to ensure financial stability and thereby increase the risk absorbing capability of the banks worldwide. The consequences of NPAs are multi-dimensional, in the sense these are aggravated by what are termed “hidden” NPAs, which are restructured advances and oftentimes not classified as NPAs. So, what appears to be the statistic on NPAs in popular discourse is without considering these “Hidden” NPAs, which ultimately could prove to be a drag on banking health, especially as regards the provisioning mechanism. Correlatively, the minimum capital requirement set by BASEL-III that the PSBs must attain by 31st March 2019 would be dragged, once these “Hidden” NPAs get exposure. Now BASEL-III is stricter in that it mandates banks to hold a capital conservation buffer of 2.5%. The aim of asking to build conservation buffer is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress. The counter cyclical buffer has been introduced with the objective to increase capital requirements in good times and decrease the same in bad times. Since, the banks have to fulfil capital requirements as laid out in BASEL-III, PSBs find themselves in a tough spot as regards competencies in adopting financial systemic recommendations unless addressing rising NPAs.
Closely connected with Basel-III norms are corporate vulnerabilities impacting banking health at a time when banks are required to increase their capital base to meet the norms. If five years preceding the global financial crisis were defining moments for Indian economic growth story and strengthening of corporate balance sheets, it reversed course following the crisis. Restructured advances of corporates, dealt with fairly in the text, were carried through the time of the crisis and subsequently provided regulatory forbearance by the RBI resulting in a temporary reprieve from the crisis. But, RBI as a regulator does not make a loan merely offering principles when a loan will be termed a bad loan or an NPA, or even for that matter a stressed asset. Importantly, the principles decide on when a forbearance could be exercised to declare it a performing loan. When the regulator decides if a loan is deemed of forbearance, s/he does it based on if the industry or the sector is showing any optimism of recovery for the forbearance to be exercised. Though forbearance ended some years back, it was revved up when the economy was starting to stand back based on requests from banks and even the Government of India. Why is there a toggle on forbearance when optimism of recovery is receding is anybody’s guess.
It’s not that the RBI’s role is to be acquitted, for in the years of the immediate aftermath of global slowdown, RBI did appear to be an extended arm of the government, which it now seems to be relinquishing. But, two contentious issues still remain, viz. the indiscriminatory nature of loan write-offs sending signals of ineligible borrowers becoming governmental (read politicians’) beneficiaries of such concessions; and indiscernible lending practices by banks to sectors with long gestation periods and a longer hand-holding period, the unaffordability of which spirals out of control into crises like NPAs. Both of these are closely tied with recapitalisation, or capital infusion by the government raising the risk of increasing fiscal deficit, a sure detriment to economic health.
Although regulatory mechanisms are on an uptick, these efforts are not yielding results to be optimistic about, and even if they are, they are only peripheral. Deterrents to prevent large exposure of banks’ bad accounts are marred by lenient approach towards: inadequate tangible collaterals during credit exposure enhancements; promoter-equity contribution financed out of debt borrowed by another bank leading to significant stress of debt servicing, and; short-term borrowings made by corporations to meet working capital and current debt servicing obligations exerting severe liquidity pressures on account of stress built-up in their portfolios. These are cursory introductions to the necessity of Large Exposure Framework (LEF) by the Reserve Bank of India (RBI). Though not dealt with in this document for want restricting the scope, this framework restricts banking sector’s exposure to highly leveraged corporates by recommending an overarching ceiling on total bank borrowing by the corporates. The idea is to secure other external sources of funding for corporates other than reliance upon bank for credit by introducing a cap on bank borrowings. With the introduction of this cap, corporates would have to fend for their working capital by tapping market sources. How well does this augur for mitigating NPAs is yet to be scrutinised as the framework is to take effect from next financial year. But, the framework has scope for recognising risks, whereby banks would be able to draft additional standard asset provisioning and higher risk weights for a specific borrower no matter how leveraged the borrower is. The issue of concentrated sectoral-risk would get highlighted, even if the single and group borrower exposure for each bank remains within prescribed limits. The framework thus limits relentless lending to a borrower reducing risks of snowballing NPAs by throwing open avenues of market capitalisation on one hand and more discernment about lending exposures to sectors vulnerable to fluctuating performance. The efficacy will only have to stand the test of time.
The issue of NPAs is reaching alarming proportions, and there is no dearth of literature coming on in explicating NPAs and ways to address them. But, what sets this document’s novelty apart from rich collated data and lucid language is the constituency aimed at. The constituency is scores of grassroots movements, and activists working on the ground resisting projects and policies promulgated by such lending practices, and often found at the receiving end due to lack of dissemination of financial knowledge and analysis in a language they could relate to, and in turn use it as instruments to further strengthen their voices. This document, a first publication of Public Finance Public Accountability Collective (PFPAC), aims to make such inroads, where others have seldom tread. Here’s hoping that this work sets into motion a train of thought amongst people still marginalized to mainstream information media, but aspiring to comprehend, discuss, debate and raise voices endangering their rights.
The vision of PFPAC aims at providing a panorama of the public financial ecosystem. Despite the repeated engagement by a host of people’s movements and non-governmental organisations on the socio-political implications of finance capitalism, we see much less engagement on the actual economic framework of corporate, finance capitalism in our day today struggles for socio-economic equality and justice. Finance Capital is becoming a controlling tool through increasing concentration and centralization of capital in the hands of large corporations, cartels, trusts and banks. Not just that, these supranational entities are also diversifying into fields with intense financial intent thus bringing to effect financialization of economy the world over. One serious outcome has been the wielding of extreme economic powers to influence political processes through development finance with investments in regions otherwise unable to attract capital. This operates on market principles, and generally seek to maximize profits and development impact by advancing policy reformulations meant to fall in line with market theories of neoliberal economics.