Reserve Bank of India (RBI) Governor Raghuram Rajan is unapologetic when it comes to bad loans. In fact, the celebrated economist declared a war on bad loans when he assumed the 18th floor corner room at the RBI headquarters in South Mumbai. "The promoters do not have the divine right to stay in charge regardless of how badly they mismanage an enterprise nor do they have the right to use the banking system to recapitalise their failed ventures," he thundered.
In his two and a half years tenure, the 23rd Governor of the RBI has tried every tool in his armoury to desist bankers from lending to such rogue promoters. Rajan knows very well that the current system of recovery - recovery courts - is not well oiled to resolve the issue in the short term. Similarly, the new proposals like bankruptcy code will also take a while to hit the ground. He has now trained his guns on the banks. The result: banks are now at the receiving end. Take, for example, the country's largest private bank, ICICI Bank, which declared its third quarter (Oct-Dec) 2015/16 results last week. The bank's consolidated net profit plunged by 4.3 per cent to Rs 3,122 crore. Its gross NPAs swelled to 4.21 per cent. The Bank's NPAs were at Rs 10,014 crore for the December quarter as compared to Rs 6,828 crore for the September 2015 quarter. Another large bank, PNB, today saw its profits sliding by 93 per cent to Rs 51 crore in the third quarter. Its gross NPAs rose to 8.47 per cent from 6.36 per cent of the previous quarter. The NPAs in absolute terms rose by a whopping Rs 10,383 crore. The stock market is already punishing both the banks. ICICI Bank's stock is down by close to 10 per cent to Rs 209 per share since its third quarter results. Similarly, PNB's stick fell today by 6.89 per cent to Rs 87.85 per share today soon after its result announcement. The banks' NPAs have been on the rise in the past few years because of an over-stressed corporate sector and also because of sluggishness in the economy. The Chinese slowdown and the fall in the commodity process are also creating problems for commodity sectors especially steel, aluminum, zinc, copper, etc. But the big change that has happened in the past six months is the RBI's aggressiveness. The RBI has been advising banks to renew certain loan accounts in the last two quarters (Oct-Dec and Jan-Mar) of 2015/16. The idea is to clean up the banks' books from any stress rather than prolonging the problem. Last week, Rajan also admitted that the central bank has discussed with banks "a range of accounts and essentially given them some time to figure out whether those accounts are regularised or moved into different categorisations". He further said: "It is now in the banks' court to move forward on this." According to bankers, the RBI has been very particular of stressed cases wherever the account is an NPA in the books of, say, one bank and a standard asset in the books of other lending banks. This happens because the promoter may be paying regularly to some lending banks. This is actually an instance of stress, though not a full-blown one that could impact all the lending banks. "RBI is actually taking a precautionary measure to avoid any losses in future," says the banker. This proactive approach of RBI is creating trouble for many banks as they have to take out money from profits to make higher provisions. Many say more banks will now report higher provisioning losses and low profits due to RBI's diktat. While Rajan has a good intention to clean up the books, it's very challenging for PSU banks, which are already starving because of inadequate capital. The operating environment, too, is not supportive of growth. But if they can manage this tough phase, they will only come out stronger. And also well prepared to support the huge growth potential that India has in the years to come.
