Nirav Modi fraud is just a name attached to the jolt suffered by one of the biggest public sector banks in the country. But the cliched skeletons tumbling out of the vaults in the strong rooms of banks are so much alarming that the banking system is on the verge of collapse in India. The total loss declared by banks so far has come to Rs. 46,000 crore this year and it will surely touch Rs 1 lakh crore by the time all banks in India declare the results.
Out of total advances of approximately Rs 70 lakhs crore, bad loans have swollen to almost Rs 10 lakh crore, according to BS Rambabu, secretary of All India Bank Employees’ Association.
Unless the government immediately swings into action to take a few remedial measures that could save the system and also insulate it from further tumult, the situation is not going to get better anytime soon.
Who is responsible for the din? Policy perfidy and political predators. Well, before getting into these details, let’s take a look at the results declared by the embattled Punjab National Bank.
The bleeding PNB
The PNB declared the biggest ever quarterly loss of any bank in the history, a net loss of Rs 13,417 crore, in the last quarter of FY2018, compared to Rs 262 crore net profit in the corresponding period last year. The looses are an immediate fallout of the fraud perpetrated against the bank by Nirav Modi and Mehul Choksi, who need no introduction. Gross Non-Performing Assets spiked to Rs 86,620 crore (against Rs. 57,519 crore in the previous quarter). The main contributors to the sequential growth in gross NPAs are Rs 7,579 crore due to Nirav Modi scam and Rs 10,237 crore due to Stressed Assets Circular given by the RBI. The bank was forced to set aside a sum of Rs 20,353 crore as provision. The provision for bad loans was pegged at Rs 16,203 crore.
The stressed assets circular issued by the RBI mandates banks to provide for 50 per cent of the bad loans towards the 36 companies that were referred to National Company Law Tribunal (NCLT), in accordance with the Insolvency and Bankruptcy Code, according to Rambabu.
He told The Finapolis that the bad loans of the companies referred to NCLT under Insolvency Code stood at close to Rs 7.50 lakh crore. What else is this, if it is not a result of regulatory red herrings and policy paralysis. In case the bank declares a bad loan as part of a fraud, it has to make a provision of 100 per cent. This naturally impacts the balance sheets.
The Rs 14,347-crore Nirav Modi fraud is one such situation. While Rs 7,178 crore (50 per cent) was the provisioning made for the fraud in the Q4, the remaining amount would be adjusted in the next three quarters. This resulted in the Capital-to-Risk-weighted Assets Ratio (CRAR) or in other words Capital Adequacy Ratio falling to 9.2 per cent as against the 11.5 per cent prescribed under the BASEL-III norms.
While the government has come up with a goody bag of capital infusion to the tune of Rs 2.11 lakh crore, the stringent PCA conditions of the RBI are arm-twisting the banks whose CAR is below the prescribed limit, bad loans are more than 10 per cent of the total advances, if the return on assets is negative for more than two years. This means the lending of loans and advances and credit exposure, expansion of branches, mobilization of deposits, recruitments and promotions in the banks would be restricted by the RBI.
The banks that came under PCA are Allahabad Bank, Central Bank of India, IOB, Bank of India, Oriental Bank of Commerce, Corporation Bank, Bank of Maharashtra, IDBI Bank, United Bank of India, Dena Bank and Uco Bank.
The NPAs’ percentage to total loans in 10 banks (PNB, OBC, Union Bank of India, Allahabad Bank, Uco Bank, Canara Bank, Dena Bank, Bank of Maharashtra, Central Bank, and Syndicate Bank) which declared annual financial results of FY2018 ranged from 11.64 to 24.64 per cent. Most of these banks have them in excess of 15 per cent.
The advances given are mostly unsecured as the corporates give security only up to 15 to 20 per cent of the loans obtained.
While yanking away the public sector banks into the hands of private sector isn’t a solution, recovery of personal assets, converting bank default into criminal offence from civil dispute, and barring individuals facing charges of default from occupying any public office are the measures that can act as deterrent, according to Rambabu.