PSU Bank recap: Rising NPAs defeat the purpose

Rs 2.5 trillion worth loans restructured under CDR while govt hopes to inject Rs 91,000 cr to recap PSU banks

Government is likely to inject Rs 14,000 crore into state-run banks by the end of September 2013 to meet the capital adequacy guidelines of 8%. Government is likely to use the divestment proceeds of PSUs to recapitalise the banks. A total of Rs 91,000 crore over the next few years will be required to recapitalise public sector banks.

While on the one hand, government is struggling to raise money to keep these banks afloat, poor economic conditions have resulted in higher non-performing assets (NPAs). Reports suggest that Indian banks have restructured more than Rs 2.5 trillion of loans under the corporate debt restructuring (CDR) mechanism.And it is no secret that majority of such restructuring has been undertaken by Public sector banks who account for three-fourth of all lending in the country.

But restructuring loans have not done much to improve asset quality. Many companies who got the benefit of restructuring have again defaulted on their loans. A report by Credit Suisse shows that out of the 17 large companies that have undergone CDR worth Rs 58,000 crore, 9 have been making operating losses.In other words,they are unable to service their loans. Nearly 10% of all restructured loans are again turning bad largely on account of external circumstances.

CDR is only the last option when banks and borrowers thrash out a working formula. Before approaching the CDR, both the banks and borrower try to sweeten the deal by working on a mutually agreeable formula. Only when this fails or some banks in the consortium do not want to be a part of this formula, does a borrower approach the CDR cell. Smaller borrowers generally do not reach the doors of CDR, they get into a new set of terms with the lending bank. These mutually agreed transactions are estimated to be nearly 10% of all lending.

These numbers highlight the rot in the system.This explains why banks are unwilling to take extra risk and lend.Lending by banks in India grew at 13.7% in June 2013, the lowest level in the last three years.

One of the reasons for recapitalizing the banks is to enable them to take further risks and increase lending. However, most of the recent lending to corporates has been through the NBFC (non-banking finance companies) route. These entities are more flexible in their lending operations. Banks fund these NBFCs who in turn lend to corporates.

The sharp rise in NPAs is scaring banks from direct lending. No amount of recapitalization will change this scenario, unless the economic scenario improves, which is unlikely to happen soon. Government is only going through the motions of recapitalizing the banks since the guidelines have to be met.