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Are Indian banks heading to liquidity crisis?

Gyanendra Keshri, Executive Editor, INCLUSION

Vijay Mallya-promoted Kingfisher Airlines was grounded in late 2012 due to its inability to meet daily operating expenses and accumulated operational losses.

When the euphoria of financial inclusion is at its peak, growing defaults by big businesses have brought the focus back on the alarming situation of the Indian banks’ balance sheets. Declaration of liquor baron Vijay Mallya as a “wilful defaulter” by United Bank of India highlights the growing stress among the banks.

A consortium of lenders that include State Bank of India, United Bank of India and IDBI has together lent around Rs 7,500 crore to Mallya-promoted now defunct Kingfisher Airlines. The airline was grounded in late 2012 due to its inability to meet daily operating expenses and accumulated operational losses.

Mallya episode highlights the building stress level amongst the public sector banks. There are several other high profile cases of possible defaults. A huge debt has piled up on Bhushan Steel. The company owes over Rs 40,000 crore to banks.

Balance sheets of most of the banks’ show that the situation is scary. The listed banks had Gross Non-Performing Assets (NPAs) or bad loans, to the tune of Rs 2.5 lakh crore as on 31st March 2014. Government-run banks that account for two-thirds of loans, have over 80 per cent of bad assets. Gross NPAs of public sector banks rose to 4.03 per cent in the financial year 2013-14 from 3.42 per cent in 2012-13 and 2.94 per cent in 2011-12.

Even scarier is the piling restructured loans that soared to 5.9 per cent of gross advances in March 2014 from 2.5 per cent in June 2011.

While the loans where the borrowers have defaulted are categorised as bad loans, restructured loans can be simply put as the situation where the borrowers have threatened to default.

Stressed loans that include the bad loans and the restructured loans now stand at nearly Rs 10 lakh core, which is more than the total net worth of the banks. Stressed loans accounted for almost 10 per cent of the total bank advances in March 2014 and is expected to soar to 14 per cent by the end of the current fiscal, according to a Fitch Ratings report.

The bulk of these bad loans are related to infrastructure projects. With the economy suffering from the worst growth slowdown in almost three decades, the pressure on the banking system is natural. But the recent episode of defaults, corruption and bribery cases involved in loan sanctioning, indicate serious systemic risk to the Indian banking system.

The Central Bureau of Investigation (CBI) recently arrested Syndicate Bank chief Sudhir Kumar Jain and Bhushan Steel Managing Director Neeraj Singal in connection with alleged bribery and irregularities involved in loan process. IDBI Bank’s Rs 950 crore loan to Kingfisher Airlines is also under the investigative agency’s scanner. 

Such widespread corruption cases in loan process indicate laxity from the regulator and a systemic risk to the system.

A rebound in economic growth offers some silver linings. The country’s Gross Domestic Product (GDP) expanded by 5.7 per cent in April-June quarter of the current financial year, against a 4.6 per cent growth registered in the previous quarter. This is the sharpest expansion in the Indian economy in two-and-a-half years. If the economic growth picks up, the delayed infrastructure projects may get back on track.

Still uncertainty looms large. The economic growth in the first quarter of the current fiscal is no doubt encouraging. But there is a big question mark on whether it will sustain. The impact of weak monsoon may hit the growth in July-September quarter.

The recent Supreme Court’s judgement on coal block allocations has also dashed the hope of any significant revival in the economic growth. The fate of the two hundred-odd coal blocks allocated since 1993 hangs afire after the apex court declared that these were made arbitrarily and illegally.

Coal plays a pivotal role in the Indian economy, especially in the industrial sector. Coal-based power generation accounts for more than two-thirds of India’s total power production. Metal, cement and several other manufacturing activities are heavily dependent on coal, either directly or indirectly. Banks have a continuing exposure of over Rs 1 lakh crore to the power sector alone, which is putting enormous pressure on their asset quality.

No doubt the situation is alarming and the regulator needs to act swiftly to fix the problems. Otherwise the ballooning stressed assets might lead to a liquidity crisis in the Indian banking system similar to the one witnessed globally after the Lehman Brothers went bankrupt in 2008.



Uttam Nayak

Only question – 14 banks were working together on the Kingfisher account. Why only 1 bank and not all 14 called him wilful defaulter?
One small bank is made to do it to look they are serious on defaults. What about the other thirteen?

(Gyanendra Keshri can be reached at gyanendra@skoch.in)

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