The NPA crisis and the Reserve Bank of India

The problem of Non-Performing Assets (NPA) or bad loans, particularly of public sector banks (PSB) shows no sign of abating. The NPAs of Indian banks are now reported to be the fifth highest in the world. International agencies like the IMF have expressed concern that the bad loan problem of Indian banks could come in the way of India’s growth.

The Reserve Bank of India (RBI) has been forced to put restrictions on a number of banks on the business they can do. The RBI has also issued new instructions to the Public Sector Banks to deal with their bad loans, so that the problem is quickly brought under control.

The gross NPAs of 21 Public Sector Banks further increased by 19% to Rs 8.5 lakh crore by June 2018 from Rs 7.1 lakh crore in June 2017. The increased provisioning for NPAs and write-offs has resulted in a 50 times increased loss by 21 Public Sector Banks totaling Rs 16,600 crore for April-June 2018 quarter compared to Rs 307 crore a year earlier. This is over and above the loss of Rs 62,700 crore by 19 banks in Jan-Mar 2018 quarter. The total provision for NPAs during April-June quarter was

Rs 51,500 crore, a 28% increase over Apr-Jun 2017 quarter.

The banks, whether Public sector or private, work for maximising their profits. When there was boom in the economy, and many capitalist monopolies launched massive projects in different sectors of the economy, there was acute competition amongst banks to lend to them. When boom went to bust and many companies which took loans became bankrupt (unable to pay even the interest on their loans), then banks also suffered the losses – they got weighed down with huge NPAs. Like all monopolies, they tried to hide the extent of losses in their balance sheets. But sooner or later, the truth had to reveal itself and it did.

Due to the mounting losses and NPAs, the RBI had to impose various restrictions such as reducing loan limits and branch expansion, incorporating additional audit, etc. under the Prompt Corrective Action (PCA) framework. The PCA has been imposed on as many as 11 banks (Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra).

For dealing with large bad loans of Rs 500 crore and particularly more than Rs 2000 crore, the RBI issued new guidelines to banks in February 2018. Around 50 large capitalists have loans of Rs 2,000 crore or more totaling to Rs 2.5 lakh crore. Many of these loans have been restructured and therefore are considered standard loan (removed from NPA category). If the resolution plan entails restructured loans, too, even existing standard loans will get reclassified as NPAs.

If the total outstanding amount is Rs 2000 crore or more, a Resolution Plan (RP) will have to be readied. According to the revised norms of the RBI, this plan must have a standard clause that at least 20 per cent of the dues on the principal amount, and interest due on this, has to be repaid within one year of implementing the plan. If the company fails to do so, it would be termed a fresh default.

Once this happens, a time limit of 180 days has been specified to resolve the NPA after which it will have to be referred for insolvency under the Insolvency and Bankruptcy Code (IBC) within 15 days of the end of the resolution period.

The new RBI guidelines have scrapped all existing loan restructuring schemes meant to deal with stressed assets. Stressed assets are a combination of non-performing assets, restructured loans and assets that have been written off.

The RBI has also introduced weekly reporting for loan defaults over

Rs 5 crore to its centralized database with immediate effect.

The new RBI guidelines want to discourage ‘re-greening’ of loans and want to use the IBC to expedite the resolution of the swelling NPAs of banks. ‘Re-greening’ is a practice of extending over-due loans by various schemes. Banks and capitalists have been colluding to save capitalists from defaulting on interest and loan and to save banks from showing defaulted loans as NPAs through re-greening.

Many capitalists are blaming the RBI for worsening the crisis by becoming too stringent. Capitalists with high level of debt, especially in the infrastructure and power sector, want the RBI to relax the norms. Many capitalists in the steel and real estate sector may face bankruptcy if the new RBI norms are enforced.

On the other hand, some of the big capitalists and groups, both Indian and foreign, are welcoming the new guidelines of the RBI of faster resolution of NPAs through IBC as it provides them lucrative opportunities to acquire productive capacities cheaply. These are the capitalists with enough cash or access to capital to buy NPA laden companies.

Tata Steel has acquired the 5.6 million tonnes per annum steel plant of Bhushan Steel Ltd (BSL) through bankruptcy process to become the largest steel producer of the country. It paid only Rs 35,200 crore as against the total loan owed to banks of Rs 56,000 crore. Bhushan Steel’s debt was the largest NPA. Banks had to write off Rs 21,000 crore of loan in the resolution of this NPA.

Big capitalists are taking full advantage of the crisis of bad loans. The system allows one company of a monopoly group to declare bankruptcy, while another company of the same group is allowed to buy a bankrupt company of another capitalist. Tata Group is preparing to declare bankruptcy of its Coastal Gujarat Power Limited, a power producing company in Gujarat, while Tata Steel is now trying to buy one more steel company with large NPA.

The current crisis, like all crisis, is resulting in some companies going bankrupt, and in increasing monopolisation, as others buy up those going bankrupt. So there will be further consolidation of various sectors in smaller number of hands, including the banking sector.

It is expected that there will be much higher write offs of loans and consequently much higher losses by Public Sector Banks in the coming year. Already the government is implementing the plan to put in Rs 2.11 lakh crore of capital into various public sector banks to bail them out of the crisis. This capital will come out of public money. This capital infusion is to take care of losses already incurred in the last few years since the problem of large NPAs surfaced. As bank losses increase, more public money will have to be put into these banks to keep them viable.

The reason why NPAs have increased to such a massive level is that banks (whether in the public or private sector) are oriented to maximizing the profits of finance capital.

Finance capital is the merger of banking and industrial capital. Finance capital dominates the Indian state. The biggest capitalist monopolies are closely interconnected with the banking system. They sit on the boards of the biggest banks as directors, while directors of banks are on the boards of the monopoly houses. They collude with the bankers to obtain preferred treatment in getting loans and their restructuring, knowing that if they are unable to repay the loan, they would be bailed out by the State. A significant part of capital borrowed from banks is used for all kinds of speculative profiteering activities by these monopoly houses. In the present NPA crisis, around 40 monopoly houses account for nearly two-third of the total bad loans of Public Sector Banks.

The measures announced by the RBI in the name of addressing the problem of NPAs, are actually aimed at safeguarding the interests of finance capital.

The overriding interests of finance capital demands that the biggest monopolies, both in the industrial and banking sector be rescued by the government by using public money in the name of “saving the economy”. Their claims are fulfilled at the expense of the claims of the majority of working people. The orientation of the economy and the banking system is set on this course.

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NPA    Sep 16-30 2018    Voice of the Party    Economy     2018   

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