There is no end to bad news from the banking sector of our economy. That it has not been in good health for some years was well known, but further evidence of its very poor health became public when it was disclosed a few days ago that the public sector banks have together suffered a whopping loss of 8,50,370 crore in financial year 2017-2018 compared to a profit of 474 crores in the previous year. Only two of the 21 public sector banks, namely the Indian Bank and Vijaya Bank, posted moderate profits of 1,259 crores and 727 crores respectively during the year. The remaining 19 public sector banks together posted a net loss 87,357 crores. Chief among the banks which posted large losses were the Punjab National Bank (1,20,283 crores), IDBI Bank (8,238 crores) and the State Bank of India (6,547 crores). In the previous year, both Punjab National Bank and the State Bank of India had posted net profits.
The delicate financial health of the public sector banks had already led to 11 of these banks to be included by the RBI under the Prompt Corrective Action (PCA) framework. What is even worse is that six more public sector banks are likely to be included in the PCA framework, raising the number of banks under this framework to 17 out of the total number of 21 public sector banks. PCA involves many types of curbs on banks like stopping branch expansion, halting dividend payments, limiting loan limits, audits and restructuring, if needed.
Last year, the government had announced a recapitalization plan for public sector banks. According to Moody's, the government recapitalization program will not be sufficient to support credit growth and will only take care of the provisioning requirements for bad loans. In October last year, the Finance Minister had announced the infusion of 2.11 lakh crores in public sector banks over the next two years. Of this, 1.35 lakh crores was to come through recapitalization bonds while the government was to infuse 65,000 crores in this financial year and another 90,000 crores in FY18. Moody's also said that the capacity of the 21 public sector banks to generate internal capital has deteriorated because of their weak financial performance and a sharp increase in government bond yields which hurt their investment in government securities.
In August 2015, the government, after a 3-day brain storming session with the banks, had announced 'Indradhanush', a 7-pronged plan to reform public sector banks. Three years later, most of the objectives remain unachieved. The gross NPAs of the public sector banks, which stood at 4.3% at the end of 2014, have gone up to 14.5% by March 31, 2018. Banking fraud has more than doubled during the last five years.
Some analysts had assured us earlier that the NPA situation had peaked and that a reversal in terms of downturn in NPAs would begin this fiscal. Unfortunately, the latest financial stability report of the RBI has put paid to any such hopes. According to this report, the bad loans of Indian banks, specially of the public sector banks, will increase further this year. Banks will not be able to set aside adequate money to cover potential losses and will thus become more vulnerable to adverse shocks. It was also likely that in a scenario of severe stress, the ratio of bad debts may rise to as high as 17.3% for the public sector banks by March next year. Clearly, the health of the banking sector is a matter of grave concern and represents one area where the government has failed miserably despite all its effort to the contrary.
The government is in the habit of blaming the previous government for all its present ills. This argument is not going to bail it out. There is no doubt that it inherited a legacy of bad loans but the people elected this government with high hopes that it would set things right. After being in power for four years, it is not open to the government putting all the blame for the present situation of the banks on the previous regime. If the banking frauds, which started in the UPA regime, were allowed to continue for four years during the present regime, then this regime has to take responsibility. If the NPAs of banks have been allowed to increase, year after year, after this government came into office, then this government has to take responsibility.
In the next election, people will not be judging the performance of Jawaharlal Nehru, Indira Gandhi or Manmohan Singh. They will be judging the performance of Narendra Modi. On all earlier regimes, the people have already given their verdict. This time, the verdict will be on the five years of the Modi regime. The state of health of Indian banks will stand out has one of the major failures of this government.
Before I end, let me also point out that selling 51% stake of the loss-making IDBI bank to LIC is a bad idea and should be shelved at the earliest. According to reports, LIC has already incurred large losses on investments made earlier in PSU banks. IDBI is a sick bank and passing it on to LIC is bound to have an adverse impact on the finances of the latter. Banking is not the core business of the LIC, insurance is. The government has no right to jeopardise the investment of policy-holders through this forced marriage. I am amazed at the alacrity with which the Insurance Regulatory and Development Authority has given its approval to this arrangement. But then if the RBI can be forced into giving its approval to demonetisation, can the lesser mortals among the regulators stand up to the diktat of a government determined to run riot?
Yashwant Sinha, former BJP leader, was Minister of Finance (1998-2002) and Minister of External Affairs (2002-2004)
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