The Great Indian Bank Trick, Blessed By The Government

Credit, it is said, is the lifeblood of commerce. If so, our banks are suffering from arterial sclerosis. And the borrowers most responsible for this are large borrowers, with exposure of Rs 5 crore and above, whose share in Gross Non-Performing Advances has shot up to over 86 per cent, according to the RBI's Financial Stability Report of December 2015 (as cited in Prasenjit Bose's article in The Hindu, from which much of the data on which this column is based has been taken).

Indeed, according to Credit Suisse Securities and Research, our "severely stressed' corporates include some of the biggest names in Indian business: Adani, Reliance ADAG, Vedanta, Essar, GVK and GMR, to name but some. Accounting for some 10 per cent of the banking system's gross advances, these big businesses are protected by the banks themselves not recognizing that much of their debt now constitutes "stressed advances", thus proving one of the most elementary rules of banking - that if you owe the bank Rs 5000, it is you who are in trouble, but if you owe the bank Rs 5000 crore, it is the bank that is in trouble!

Bank credit, which was rising at an annual average of 30 per cent during the halcyon years 2004-07, has now shrunk to under ten percent during Modi's acche din. The slowing of the economy has been caused primarily by a sharp decline in investment rates, which causes (and is caused by) the declining availability of bank credit. The banks are in bad trouble; so are enterprises in need of credit.

To keep their credibility going, banks roll over much of the debt through a process known as the "restructuring" of corporate debt to make it appear that the banks will be paid in due course. Instead of the banks' balance sheets indicating that these large debts are, in fact, unpaid debts that should be classified as "Non-Performing Assets", they are ever-greened to look viable. Despite such accounting tricks, gross "stressed advances" are in the region of Rs 9 lakh crore - that is, three to four times the budget provision for social sector and anti-poverty programmes. It makes one think that where the US banking crisis was brought about by "sub-prime" loans, our banking crisis has risen principally from super-prime lending to honchos who prove their worth by holding lavish parties and dining in expensive restaurants even as they wallow in unpaid and unpayable debt.

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To all this is added the practice of "writing off" debts that are unpaid and can probably not be recovered. The Ministry of Finance are of the view that "write-offs" are basically "technical" and are allowed by the law and RBI Guidelines. In other words, this is a form of creative accounting that enables banks to present a rosier picture in their balance sheets than would have been the case if these loans were classified in the language of the common man. On the basis of information obtained under the Right to Information Act, The Indian Express of 9 February have headlined that a massive Rs 1.14 lakh crore have been written off by government-owned banks in the last two years, 2013-15. Staggeringly, bad loans now constitute 60 per cent of all loans. Bad debts of the State Bank of India alone now range in the region of Rs 23,000 crore, four times higher than two years ago.

Besides, Finance Minister Arun Jaitley will probably continue the well-established practice of granting exemptions in tax legislation that would cause "revenue lost" of around Rs five lakh crore every year to keep the private sector in good humour.

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It is in these circumstances that "Make in India" is being sold to potential investors, Indian and foreign. Like the cultural venue that went up in flames at the investment jamboree in Mumbai, so also are the prospects of manufacturing growth in the country being made a bonfire of in the face of a collapse in demand for goods made in India, both within the country and abroad. Exports have been plunging quarter after quarter for the last 14 quarters. And rural demand is stagnating in the light of the government's failure to substantially increase rural incomes. There has been a virtual freeze in Minimum Support Prices; so, rural demand is stagnating, indeed declining in many agricultural sectors because two years of drought, with the government doing little for supplementary income support, has left farmers with little to spare for purchasing manufactured goods.

The collapse of demand has led to collapse in fresh private investment. The only way out of this chakravyuh is a massive increase in public investment. But the BJP is ideologically against the public sector. So it seeks to stimulate capital availability to the private sector by forgiving the big enterprises for their past sins through "technical" adjustments to the balance sheets of banks that will enable such enterprises to continue huge borrowings from banks without being under any compulsion to pay these loans back within the stipulated period. To do this, there is talk of setting up a Government-owned Assets Reconstruction Company, which, at public expense, will buy up packages of bank loans, good and bad, at a discounted rate to bail out the banks that would otherwise sink. This is estimated to require Rs 70,000 crore of your money and mine. Additional capital running to thousands and thousands of crore will in addition be infused into banks by way of "recapitalisation". Thus, both the imprudent banks and their predatory customers will be let off the hook.

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And who will bear the burden of all this assistance to the richest of the rich? The poor, of course, particularly the poorest of the poor. For, to achieve "fiscal consolidation" - that is, the balancing of the books - budget allocations for schemes for the poor, such as MNREGA, will have to be slashed to find the funds to "stimulate" the defaulting rich. Is this justice? The BJP is discovering the answer in panchayat elections in state after state. Karnataka had just added to the string of reverses the BJP has been facing, beginning with its stronghold in Gujarat. Perhaps they will still learn that we are a poor country.

(Mani Shankar Aiyar is a Congress MP in the Rajya Sabha.)

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