Banks aren’t the only ones to blame for India’s bad-loans crisis

Plug the leak.
Plug the leak.
Image: Reuters/Mukesh Gupta
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If India’s banking sector is in a mess, it is not just the lenders who are to blame.

The government and the judiciary, too, have had a role in the industry’s massive bad-loan problem, believes Rajnish Kumar, chairman of India’s largest bank, the State Bank of India (SBI).

“I would say everybody is responsible, be it the bankers, be it the industry or borrowers, be it the government, and without inviting contempt of the court, even the judiciary has played a role in this situation,” Kumar said at an event in Mumbai on Aug. 20.

By the end of March 2018, the banking sector’s gross non-performing assets (NPAs) had risen to 11.6% from 10.2% in September 2017. These are loans on which re-payments have been delayed and there is a possible chance of a default. In the coming months, the situation may worsen if the conditions do not improve, the Reserve Bank of India (RBI) has warned.

Kumar cited the example of the coal block allocation where firms had invested in a business in 1996 based on a government assurance of coal availability. They could not have predicted that after 20 years, coal block allocations would get cancelled and their entire investment would be jeopardised, he said. So when in 2014 the supreme court cancelled the allocation of 214 coal mines awarded between 1993 and 2010, deeming the process illegal and arbitrary, banks suffered as they had lent massive amounts to the mining industry.

In spite of the structural challenges, the banks still shoulder a large part of the blame and also need to overhaul their loan disbursal and underwriting processes. Kumar admitted that in the past loans were given out chiefly on the basis of “trust,” a process that has been misused by errant borrowers.

“Now we will trust, but we will verify. Probably that verification factor was missing in the past,” he added.

But banks have been slow in processing loan applications, and this delay has added to the bad-loan problems. Typically, in order to mitigate the risk of lending, banks form a consortium to lend for bigger projects. But now, cracks have emerged in this set-up.

“…Instead of lessening credit risk, consortium lending has mostly increased the pain as inordinate delay in loan appraisal has most of the time killed projects,” Kumar said.

The NPA crisis has been so dire that 11 out of the 21 government banks have been put under a corrective action framework by the RBI. Several restrictions have been placed on them, including a bar on one lender, Dena Bank, on lending itself.

There is a ray of hope, though, as bankers believe they have begun to see a turnaround in business. “March 2018 was a peak; we are seeing a decline in NPAs as the resolutions happen,” said Kumar.