Story of pushing privatization in banking sector and utilizing Jan-Dhan for bailing out willful corporate defaulters

The RBI recently hiked the interest rates by 25 basis points for the first time in four and half years reflecting the hardening up of Whole Price Index (WPI) to 5.77 percent, the highest since December 2013. The general perception is that the economy is stagnating even as trade deficits hit record levels of 16 billion in June 2018 with exports failing to cope up with the high import bill which will only put further pressure on rupee. The present regime is tinkering with the way Gross Domestic Product (GDP) is measured so as to avoid showing the economy in as bad a light in growth terms as it arguably is especially taking figures of manufacturing sector into account.

Abysmal State of Banking Sector

While the economy is in tatters the banking sector in India, still led by Public Sector Banks (PSBs), has been moving fast to the brink of a major disaster with Modi Government’s big ticket announcements for the sector in name of INDRADANUSH, as early as May, 2015 showing no impact on the numbers that matters for the banking sector.

In the last financial year of which the results are out i.e. F.Y. 2017-18, all PSBs have reported a total combined loss of staggering Rs 87,000 Crore with the fraud-hit Punjab National Bank leading the pack as the biggest loss-maker. Of the 21 state-owned banks, only two banks, Indian Bank and Vijaya Bank, posted profits during 2017-18. It won’t be out of way to compare it with the total combined profits of PSBs for FY 2013-14, after which Modi government assumed power, which was of Rs 37,393 Crore. Under the Modi Government the Non Performance Assets (NPAs) of PSBs have ballooned to more than 400%. The Gross NPAs of PSBs which were at Rs 2.19 lakh Crore in June 2014 shot upto Rs 8.97 lakh Crore in March 2018. In percentage terms, the Gross NPAs of the PSBs which stood at 4.3% at the end of 2014 have gone up to 14.5% by March 31, 2018.

The recovery rate of bad loans though has fallen under present ruling establishment despite much talked about Insolvency and Bankruptcy Code being mooted as a strong and timely solution for NPAs issue (more on this later). In the four financial years beginning from 2014 the PSBs could only recover Rs 29, 348 out of Rs 2.72 lakh crore of bad loan written off in this period by PSBs. Thus around 90 percent of bad loans couldn’t be recovered in these financial years.

Reasons For The Abysmal State of PSBs

Amongst other structural issues flowing from the neoliberal policy framework, two important policy measures are responsible for the present abysmal state of PSBs. With adoption of neoliberal policies by successive governments for more than three decades now, the general loosening of financial sector controls has resulted in rapid increase in foreign financial inflows in the country much of which has also found their way in increased deposits in banks. The increase in liquidity swelled deposits with the banks and forced a sharp increase in the credit advanced by the banking system. The credit-fuelled nature of growth which was anyway promoted to fuel demand got an additional push in this though the quality of credit got compromised in the process. As the Reserve Bank of India (RBI) has itself recognised, the rapid buildup of credit resulting from the expansion in deposits provided the ground for inadequately informed or risky lending decisions.

The second important reason for the crisis of credit, flows from the conscious decisions of the Governments under pressure from IMF and World Bank, to adopt fiscal prudence and fiscal discipline. One of the forms it has taken is the reluctance of the Government to take responsibility for infrastructure creation. The private sector was ‘encouraged’ to come out and take responsibility for infrastructure sector with PSBS being pushed to foot the financial bill in form of increased exposure to infrastructure sector through lending to private players, the field hitherto reserved for lending for development institutions as the sector involved longer time horizons and gestation period. Even the look at composition of present NPAs would make the point clear as major chunk of NPAs have come from infrastructure lending. While corporate loans amount to around eighty-five percent of NPAs, half of this is in form of infrastructure lending. The Modi Government has only accelerated these existing policies with further doses of cronyism added to it. The story of the Modi Government pushing SBI to loan Rs 6,000 crore to the debt-ridden Gautam Adani. The story of Nirav Modi, Vijay Mallya and Mehul Choksi fleeing the country and lenders extending a helping hand for takeover of the debt-ridden Reliance Communication by Mukesh Ambani Jio is too well known for it to be repeated here in detail.

Solutions to the Problems More Problematic Than the Problem Itself

It can be argued by the apologists of the Modi Government that to some extent the increased numbers of NPAs is due to the reclassification of the debts by the RBI which has in fact brought the problem to the surface. This argument for the sake of argument is fine but the problem lies elsewhere and it is the most pertinent question that should be put at the centre of the debate - what does the Modi Government intend to do for the banking crisis after recognising NPAs clearly? Here lies the problem - all the decisions that the Modi Government took after assuming power clearly show that it doesn’t seeks to revive the PSBs from the banking crisis created in larger context due to successive doses of neoliberalism but want to utilise the crisis as an opportunity to push for privatisation in the banking sector, hitherto dominated by PSBs in India. Who knows and reads this intention of the Government better than the ‘market’ itself! The combined market value of all listed public sector banks has plummeted below that of one private lender – HDFC Bank – and the stock market performance of 14 public sector banks (PSBs) after 2014 shows that out of them eleven banks have seen erosion of anywhere between 11.37% to 75.5% in their market cap. In contrast, most private banks have seen an impressive increase in their market cap during the period of Modi Government. For example, HDFC Bank’s market value has jumped by 135% to Rs 4, 87,256 crore. The market cap of Axis Bank and ICICI Bank has risen by 43% and 22% respectively.

Amongst the most talked about solutions to the banking woes was the government’s proposed Financial Resolution and Deposit Insurance Bill (FRDI Bill) which was in fact intended to push the burden of the crisis of banking sector on the common depositors by arming the newly created authority under the act with unilateral powers of mergers, writing off deposits, retrenching employees etc, powers hitherto unknown in banking in India. The ‘Bail in’ clause in the Bill was intended to be institutionalised mechanism for looting people savings in form of bank deposits for bailing out defaulting corporates who have piled up huge NPAs to the their credit! The most humble of depositors were intended to foot the bill of corporate loan defaults with Government simply walking out of the responsibility of making them accountable towards their outstanding debts. For the sake of brevity arguments against FRDI Bill are not repeated here (Refer to earlier write-up in Liberation. It was only determined effort of the people of India that have seen through the design that has forced Modi Govt to withdraw the bill. This victory of the people can be counted amongst the best on economic front along with earlier Land Acquisition (Amendment) Bill which this govt tried to promulgate three times through ordinance for facilitating land acquisition but finally had to withdraw in wake of determined agitation by the farmers.

The Insolvency and Bankruptcy Code (IBC) enacted in 2016, is another neoliberal measure by the Modi Government which claims to help resolve the NPA crisis: the argument is that it will pave the way for earlier resolution of litigation resulting from outstanding bank debts through the newly created mechanism of National Law Company Tribunal (NLCT). Two years down the line the IBC has yet to show much impact and only gained momentum recently when RBI identified 12 big-size bad loans of banks to take to the insolvency route.

Of these, only Bhushan Steel has just got resolved —Tata Steel bought it for Rs 32,500 crore. The fact that the lenders took a 60 per cent haircut (financial jargon for what is called write-off in simple words) in the deal which is being showcased as being in favour of lenders shows that the real intention behind it is that PSBs take the haircut to resolve the crisis but of defaulting borrowers! Asset Reconstruction Companies (ARCs) have propped after the code but the whole effort is for taking over the stressed secured debts at dirty low prices and/or PSBs being forced to take huge haircuts in case of recovery plans for the borrowers is mooted at NLCT. In name of freeing up of capital for productive purposes, big capital is only likely to utilise the IBC code to expand through the brownfield route (expansion through mergers and takeovers in contrast to Greenfield route which depends on organic growth of the enterprise) at the expense of their small and medium counterparts while the financial sector eats up the cake through the ARCs route. It’s well known that small and medium enterprises employ the majority of the workforce in the country. Thus, the brunt of this brownfield expansion through buyouts and takeovers of small and medium enterprises for benefit of big capital would indirectly be on working people in form of further unemployment, which is already at record levels, putting further downward pressure on already stagnant wage market. (Refer to earlier write-up in liberation for more detailed analysis of the code.

After concerns were expressed that the Government’s unwillingness to name the corporate defaulters publicly would only be used by wilful defaulters to acquire the same assets by bidding for them under the code, an amendment to the code was brought in 2017, for public consumption. But it has been argued that loopholes still exist in law that can be utilised by wilful defaulters through back channels. The best way to counter this continues to be by naming the wilful corporate defaulters publicly along with the promoters but the Government continues to hide their identities for reasons that are not difficult to understand!

Conclusion

The delicate financial health of the public sector banks had already led to 11 of PSBs to be included by the RBI under the Prompt Corrective Action (PCA) framework brought out purportedly with intention to identify the banks in crisis early. It’s feared that six more PSBs would be added making the numbers shoot up to 17 out of total 21. PCA involves many types of curbs on banks like stopping branch expansion, halting dividend payments, limiting loan limits, audits and restructuring, if needed. Such curbs will rule out organic expansion of banks: an expansion which is the best way to address the banking crisis if government is willing to refinance capital of banks adequately. The immediate extent and pressure of crisis did force the government to announce recapitalisation plans for public sector banks to the tune of Rs 2.11 Lakh Crores last year. But even according to Moody's, the government recapitalisation program will not be sufficient to support credit growth and will only take care of the provisioning requirements for bad loans. Moody's also said that the capacity of the 21 public sector banks to generate internal capital has deteriorated.  But the Government is unwilling to lend a helping hand, and its neoliberal defenders argue such measure will put great stress on the fiscal position of the government. This is an utter lie as it merely involves the government seeking credit from RBI in form of bonds which are to be utilised for recapitalising banks. In essence these transactions are mere book entries but the Government’s intention to utilise the pretext of NPAs for privatisation of banks, put best by none other than Niti Aayog Chairman Arvind Pangariya when he suggested that all serious political parties should include privatisation of banks in their manifesto for 2019 elections, is the only thing stopping the Government from adopting this measure.

Demonetisation was only especially dictatorial way of sucking people’s small savings to address this crisis by infusing liquidity in the banking channels; talk of cracking down on black money was only a political cover for this. Black money thrives as much as ever now while poor people lost more than Rs 5,000 Crore of ‘Jan Dhan’ in form of minimum balance charges in the financial year following the Note Ban.             

The Modi Government is in the habit of blaming previous governments for all its present ills. Such frivolous arguments are not going to ‘bail’ it out. It has to take responsibility for the increasing NPAs, year after year, after this government came into office and for low recovery rates of bad loans which are best manifested in record losses of PSBs and their falling market cap with private sector banks and corporates gaining at PSBs expense. The creeping privatisation is already underway with the share of PSBs in overall lending of banks coming down drastically under Modi regime and the only way to resist complete takeover of our public owned banks by likes of Adani and the Ambanis in collusion with their international financial masters is to stop the Modi Government from coming back to power in 2019.