No one seems to be happy, these days, in banking circles. The recent moves by the Government to give more teeth to the RBI to go after defaulting companies and their boards had caused euphoria initially, but that that is quickly giving way to despair amongst banks.
Reason? Hitherto, the banks were allowed to " sleep over" the Non_Performing Assets (NPA) mess, ie, loans given to big industrial houses that have gone sour,with little prospect of recovering them, under the existing laws, without writing them off in their books. Many Public Sector Banks ( PSBs) saw their CEOs adopt this tactic very smartly, wherein, without writing off the bad apples, they kept on postponing the problem, for their successor to come in and handle. It may be noted that apart from a few "stupid" private banks, the PSBs were manipulated by greedy business magnates, over the years, to oblige them with loans that looked dubious, to say the very least. Some willing bureaucrats heeded the advise of their political masters, enabling swindling of huge swathes of money over the last 7 decades.
Now, firstly, the RBI is empowered to take on the defaulters, and bring them " to the street" if required, in order to recover the loans. That means, the Vijay Mallayas of the world cannot any more hide behind the "limited liability" concept, cajole politicians, bureaucrats and banks to lend them thousands of crores of rupees without proper risk assessment and collateralization being done.
Secondly, and more importantly, the banks will be required to "hand over" the bad apples to RBI, but only after writing them off in their books, after the mandatory waiting period, as laid down in the guidelines of the Indian Bankers' Association (IBA).
What are the potential fallouts of these over the short to medium term?
One, banks because of the write-offs, banks in general can be safely expected to report poor quarterly earnings over the next few quarters. Their stock prices may correct, from the rather lofty valuation currently. Banks are the backbone of the Stock market, and therefore, the ripple effect may be seen in the Stock Indices correcting, too. Any Geo political events that may weigh, over and above this, could only exacerbate matters. Therefore, the risk to reward, in stock markets appears to be diminishing for now. This view of mine is for the short to medium term only.
Two, expect more industrialists to be pulled up legally for default. This is likely to send shivers down the spine of many. Essar, Videocon, Bhushan Steel, GVK, GMR, Suzlon,Lanco etc come to my mind, but there could be many others too. The will throw water in the already poor investment climate, where fresh investments are hard to come by, a fact borne out by the fact that lending to the capital goods sector has actually been going down over the last three years. So, until clarity emerges on who is going to be spared, expect investments to lie low, and therefore, GDP growth to continue to be pale, at around the 7% mark. There is no reason to despair, though, since there is enough excess capacity available for the economy to absorb in case demand picks up. And, in any case, compared to even China, a 7% GDP growth is pretty good, by any yardstick. The unknown entity here is the monsoon. If we end up with a reasonably good monsoon, then things may not have much of an impact on demand. However, if the monsoon fails this year too, as has been happening over the last three years, then Modi will have a tough time coming back to power in 2019, and this likely economic backdrop.
I am disappointed that while the Government has addressed the immediate sick baby - NPAs - they have not yet gone to the root of the problem. While failed enterprises are the foundation of any robust capitalist economy, in India, Risk Assessment and management for Banks, is either very weak, or can be easily manipulated, or both. So, while, the nation may grin it's teeth and clean up the balance sheets of Banks as a "one-time" pain, the problem is likely to resurface, unless lending norms are tightened significantly. To me, Arun Jaitley's acid test lies here. So far, he has failed, but tomorrow could well be different.
So, are there no positives out of this seemingly despondent scenario? Of course there are.
Firstly, expect awareness amongst public and banks to increase. Expect push-back, when it comes to lending. Banks may insist on tighter norms for lending. Politicians may still have their way, but it is going to be more difficult than before. This clean-up exercise sends out a strong message to the sharks out there, that manipulating the system for their personal gains, is getting increasingly difficult, if not impossible.
Secondly, for every Dhoot or Ruia or GVK Reddy who will come under the hammer, expect green shoots to come in. This, to me, presents the more exciting aspect of this clean-up. Tomorrow could well see new business leaders, with fresher ideas, come in and make a difference.
Whether that difference will point towards the positive direction, remains to be seen.
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Picture Courtesy: The Economic Times
http://economictimes.indiatimes.com/news/economy/policy/indian-banking-wont-be-the-same-again-if-rbi-gets-to-clean-the-bad-loan-mess-heres-why/articleshow/58601700.cms
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