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Taxpayers will have to Pick-Up the Final Bill of the Mess in Govt Banks

Feb 16, 2016


In a column I wrote last week I said that I was happy that the profit of the State Bank of India, the country's largest bank, had fallen by 62%. Along the same lines I need to say that I am happy that the Bank of Baroda has made a loss of Rs 3342 crore, for the period October to December 2015. This is the biggest loss ever made by any Indian bank. In fact, the losses would have been higher if not for a Rs 1,118 crore tax write-back that the bank got.

Over the years, banks have not been recognising bad loans as bad loans. This process that has started now and is bringing out the real state of the Indian public sector banks and that is a good thing.

In case of Bank of Baroda, the gross non-performing loans (or bad loans) of the bank jumped by 152% to Rs 38,934 crore, in comparison to as on December 2014. In percentage terms, the bad loans as of December 2015 stand at 9.68% of total lending in comparison to 3.85% in December 2014.

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What this clearly tells us is that the Bank of Baroda, like the other public sector banks, had been under-declaring its bad loans up until now. This can be easily said from the fact the bad loans as a percentage of total loans, as on September 2015, had stood at 5.56%. By December 2015, this had jumped up by 412 basis points to 9.68%. One basis point is one hundredth of a percentage.

The situation could not have become so bad over a period of just three months. This clearly tells us that the bank had not been putting out the correct situation of its loans earlier. But now that it is, the stock market is clearly happy about it, with the stock rallying by 22% to Rs 139.55 as on February 15, 2016.

It needs to be pointed out here that the public sector banks are finally getting around to presenting the right set of accounts because the RBI led by Raghuram Rajan has pushed them to do so, by unleashing the asset quality review on to them.

As Rajan pointed out in a recent speech: "With markets generally in decline, the decline in bank share prices has been more accentuated. However, part of the reason is that some bank results, mainly public sector banks, have not been, to put it mildly, pretty. Clearly, an important factor has been the Asset Quality Review (AQR) conducted by the Reserve Bank and its aftermath."

This leads to the question as to what was the RBI doing all these years, especially in the pre-Rajan years given that such a huge build-up of bad loans couldn't have happened overnight.

Also, it needs to be clarified here that a bad loan doesn't mean that the bank has lost all the money. This seems to be the general understanding and is incorrect. A loan is typically declared to be a non-performing asset (or a bad loan), 90 days after the borrower starts defaulting on the interest and principal payments. When this happens a bank can no longer continue to accrue interest on the portion of the loan that remains unpaid. It has to start making provisions i.e. start keeping money aside.

This basically means that the bank starts keeping money aside so that if the loan is totally defaulted on or partially defaulted on or the bank cannot recover enough money from the assets that it has as a collateral, then enough money has been set aside to meet the losses.

Along these lines, the Bank of Baroda has increased its provisioning. For October to December 2015, the bank set aside Rs 6,165 crore. This is an increase of 389% in comparison to the money it had set aside for September to December 2014.

The question is even with this huge jump in provisioning, is the bank setting aside enough? The Reserve Bank of India(RBI) Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances: "Banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn. This will enhance the soundness of individual banks, as also the stability of the financial sector. It was, therefore, decided that banks should augment their provisioning cushions...and ensure that their total provisioning coverage not less than 70 per cent."

The provisioning coverage ratio is defined as the total provisions set aside by a bank as on a particular date divided by the total gross non-performing assets (bad loans) of the bank as on the same day.

The RBI wants banks to maintain a provision coverage ratio of 70%. But that doesn't seem to have happened. In fact, as a recent news-report in The Indian Express points out: "An analysis of provisioning coverage ratio data of 20 public sector banks for March 2011 to March 2015 shows a steady fall in the coverage ratio. It has dropped from an average of 72 per cent for the group of 20 banks in the year-ended March 2011 to 57 per cent for the year-ended March 2015."

In fact, for Bank of Baroda, the provisioning coverage ratio as on March 31, 2015, had stood at 64.99%. Since then, despite the absolute jump in provisioning, the provisioning coverage ratio of the bank has fallen to 52.70%. So, the bank clearly is not setting aside enough money against its bad loans, even though its setting aside more money in absolute terms, than it has done in the past.

How do things look for other banks? Let's take the case of Punjab National Bank, the second largest public sector bank. The provisioning coverage ratio of the bank as on March 31, 2015, was at 58.21%, since then it has fallen to 53.85%. The same is the case with the State Bank of India. The ratio has fallen from 69.13% to 65.23%.

So none of the bigger public sector banks are fulfilling the provisioning coverage requirement of 70% as required by the RBI.

What this tells us is that if the banks work towards achieving this ratio in the coming quarters, the losses of these banks will only go up. This would also mean eating into the capital of the bank.

Also, it is worth asking here what portion of the bad loans will the public sector banks be able to recover? The answer is not encouraging if we look at the numbers of the two biggest banks-the State Bank of India and the Punjab National Bank.

During the course of this financial year, the State Bank of India has managed to recover loans of Rs 2,761 crore. During the period its bad loans jumped up from Rs 56,725 crore to Rs 72,792 crore.

How do things look for Punjab National Bank? During the course of this financial year, the bank has managed to recover loans worth Rs 6,382 crore. During the same period, the bad loans of the bank have jumped from Rs 25,695 crore to Rs 34,338 crore.

For both, State Bank of India as well as Punjab National Bank, there has been a huge jump in the loans recovered in comparison to April to December 2014. Nevertheless, the total amount of bad loans has gone up as well, in effect negating the recoveries. And this doesn't augur well for the banks.

My guess is that public sector banks losses will eat into their capital in the months and years to come and the government (i.e. the taxpayer) will have to keep coming to their rescue by infusing fresh capital into these banks. Since 2010, the government has pumped in Rs 67,734 crore into public sector banks. It will have to put in a lot more money in the days to come.

As Michael Pettis writes in The Great Rebalancing: "Traditionally the cost of a banking crisis is borne directly or indirectly by households. Whether it is in the form of foregone deposits, government bailouts funded by household taxes...Households always foot the bill for banking crisis."

The situation in India will be no different.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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13 Responses to "Taxpayers will have to Pick-Up the Final Bill of the Mess in Govt Banks"


Feb 17, 2016

Nationalising of bank was the original SIN, committed by the greedy and selfish political class, that enabled them to dig
into the coffers of savings of common citizens of India. These people, guided by the clever bureaucrats, went on dishing
out favours to themselves, their kith and kin and their favourite industrialists, without any consideration about the interests of the lending
Banks. The State control of appointments , promotions and transfers of Banking staff, was and is used, to force their ways on them.
2. As a first step, the Banks need to be liberated from political control, that gives the Ruling Parties Pawer without any responsibility or
accountability. The Government should not get into business of business. It should concentrate on doing its constitutionally mandated
job of Governance; And fine tune the laws to ensure that rich and politically powerful FAT CAT WILFUL DEFAULTERS, are dealt with
a strong hand. Refinancing of any one at tax payer's cost, amounts to cheating the taxpayer, and rewarding the defaulters and the complicit managements.
3. The Government needs to ament criminal/ civil laws, to enable it confiscate all assets of all defaulters and their close family members to recover the loans. And where these fall short, the borrowers should be imprisoned and put to work. All their earnings from work in prison, should be used to meet their debits, after deducting the cost of their imprisonment.



Feb 17, 2016

The entire activities which are choking our economy are well known, well appreciated and the prognosis is also very clear to those entrusted with the task of due diligence and decision making . Yet they regularly fail to take correct decisions , which can only baffle the most simple minded souls. Our cities ,cars on the roads and ostentatious private functions and other trappings show that the policy makers are either out of touch of reality or just plain don't care. In our everyday experience no household can be sustained in case their expenditure is beyond their means for very long ,with liability being passed to the future generations. Loans are taken to create avenues of future wealth creation and tide over emergencies. A society which is shy of acknowledging that wealth creation is not evil will take and support expedient decisions which will only benefit a few at the cost of many.
Closing down loss making activities frees the capital for wealth creation by individuals and societies. While food security is essential , it is a sin in case it is mismanaged . Why are large resources, even in food sector locked up when it can be primarily be used to create rural wealth .The badly stored food grains are allowed to rot regularly and then auctioned off to convert grains into beverages. This is a very lucrative business model for the unscrupulous people at the cost of the nation . Food lending is priority lending and allows higher costs for other borrowings.Creating assets , infrastructure , housing and hospitals in the rural areas will help our economy and the people, particularly the poor. This will also prevent mass migration to choked cities which create slums across the country.
High taxes on goods and industry , high borrowing costs and poor infrastructure are going to choke productivity making industry uncompetitive globally since cost of production is high. Let sensible people take proper decision which helps larger numbers from grass root levels. Factories must come up due to positive business environment rather obtaining short time subsidies and benefits in a particular region .



Feb 16, 2016

The suggestion that Banks need to keep amount aside for Bad Loans is a bad idea.the correct approach is:-
2.Collateral,recoverable without Legal hassles to be posted for loans.
Raghuram Rajan was an apologist for the defaulters until some bloggers questioned the oversight of the RBI recommending no extension for him for bad performance.
As an aside,but none the ess pertinent,India needs Physical gold in its Forex which mainly is Fiat Currencies.



Feb 16, 2016

Yes, We, the taxpayer will have to borne the bill for wrong doings of policy makers at the helm of affairs. Since last fifteen years or so the story is the same ,the public sectors banks are advised to advance the projects for economic growth. The projects are saddled with so many policy bottlenecks and runs behind the time and due process the projects become stagnant. The government is interested in statistics of growth on paper.As we all are aware that Kingfisher's advance was not wise or professional decision. I think we can not make responsible to Chairman and Bank management alone. Recently , the Adani group's venture in Australia was also in limelight after SBI intended to fund the project. This all leads us to look at political interference in the management of Public Sector Banks.
Besides, in recent years first it was infra sector which was in trouble and now metal sector is in trouble. That has accelerated the NPA problems for Banks.

Like (1)

A Chopra

Feb 16, 2016

Please be kind enough to tell this also that this mess was created by previous govts and the present one is trying to clean up the mess.

Like (1)


Feb 16, 2016

Yes, Indian consumer is already paying for it through increased excise duty on fuel and higher import duties to protect steel industry. Indian consumer hasn't benefited from the global commodity crash.

Like (1)

t raghavan

Feb 16, 2016

Zombies were your favorite subject. I commented on one of your stinkers on zombies i had commented that zombies are there because their legitimate dues are usurped for so called "too large to fail". Now the poor tax payers have to pick the bills for the loans which the super riches of India refuses to pay back. The arm chair economists & analysts are always agitated about a few crores which goes to bail out deserving poor like farmers. But not even a wisper about these super riches who are willful defaulters. The poor always gets a thrashing all over the globe.

Like (2)


Feb 16, 2016

The heading of the article suggests that state banks are big culprits in the mess. This article and in other articles by private media, nowhere is it mentioned about the private rich and very influential businessman who are the actual culprits of this whole mess. In fact laws have been made such that the real culprits cannot even be named. it is a pity that they are going scott free without any kind of penalties and the whole banking system is being blamed.

Like (1)

subramanian k v

Feb 16, 2016

Is this just a case of banks (PSU banks) enjoying (enjoyed?) unbridled freedom to mislead the share holders and the Indian Public on the state of their affairs, by using convenient reporting practices? Misuse of reporting flexibility? Don't we even have a tight reporting and recognition standards so that bank managements don't resort to over adventurism in reporting? Why is it that whenever the top man (or woman) changes in the PSU banks, there is sudden discovery and reporting of the accrued muck left over by the predecessor and then during the tenure of the new CEO the new muck starts getting accumulated? why is it that the Finance ministry looks the other way whenever such swings come to notice? Is it just a case of the borrowers enjoying the patronage of the govt, politicians and bank management combine or is this a much more deeper malaise? Who is (are) the real beneficiaries of the NPAs, write offs, debt restructuring and so on? The cost is incurred by the tax payer!!!

Like (1)

V S Ram

Feb 16, 2016

Interesting article. As a tax payer I worry at these trends as I am sure many like me do. You have rightly asked what RBI was doing all these years. An equally pertinant question is which are the badloans, and during which chairman/ MD's tenure were they sanctioned? Persons who made these decisions are at the very least guilty of poor judgement. If the banks/RBI/government do not ask this question and go after those who made such decisions, we will have more of the same in future. I also worry that many such managers have moved on to positions of even higher responsibility in the government/ public sector.

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