India faces a fresh threat of NPAs with RBI warning dramatic rise in loan default rate from 8.5% in FY20 to 14.7% in FY21. A global study shows the Indian corporate sector was most debt-stressed with 43% of long-term loans vulnerable to default even before the COVID-19 pandemic hit
Prasanna Mohanty | August 5, 2020 | Updated 21:51 IST
On July 31, 2020, Finance Minister Nirmala Sitharaman announced that talks were on with the banking regulator RBI to extend the moratorium on repayments and restructuring of borrowings beyond August 31.
This was after the RBI released its Financial Stability Report on July 24 issuing a dire warning: Macro stress tests indicate that the Gross NPA (GNPA) ratio of the Scheduled Commercial Banks (SCBs) could rise from 8.5% in FY20 to 12.5% under baseline scenario and 14.7% under very severe stress in FY21 because of the lockdown-induced economic disruptions.
Although Sitharaman's statement came in the context of hospitality industry, extension of moratorium or restructuring of borrowings can never be restricted to one sector since many others, like aviation and MSMEs, are hit equally hard too.
Evidence shows such remedies are fraught with damaging consequences for the economy by worsening the debt crisis and weakening banking finances. But before getting there here is how big the debt crisis is.
Also Read: Rebooting Economy XII: Is private sector inherently more efficient than public sector?
What do GNPA ratios of 12.5% to 14.7% mean to Indian economy?
The RBI has stopped providing data on the non-performing assets (NPAs) it is writing off every year, thereby blunting accountability and transparency in its operations. It hasn't revealed the GNPA for FY20 in absolute number (in Rs crore) either, but says the GNPA ratio (GNPA/Gross Advances) in FY20 is 8.5%.
But this can be easily calculated. Here is how.
The simple averages of the GNPAs and Gross Advances of the SCBs for the previous five years between FY15 and FY19 (for which data is available in the RBI database) work out to be Rs 7.4 lakh crore and Rs 87.5 crore, respectively.
Let us assume these average holds for FY20.
Now the GNPA ratio for FY20 works out to be 8.5%, perfectly matching with the RBI's declaration (that is perhaps how the RBI calculated it too).
Assume also that the FY20 levels of GNPA and Gross Advance hold true for FY21. What would the projected rise in the GNPA ratios to 12.5% and 14.7% mean for the GNPA in absolute terms?
The GNPAs for FY21 would be Rs 11 lakh crore and Rs 13 lakh crore, respectively.
These are very big numbers - 7.5% to 9% of the FY20 GDP (GDP at constant prices for FY20 is Rs 145.66 lakh crore, according to the NSO's May 29, 2020 statement).
Imagine there is no GNPA for FY21. Banks would not have to set aside money as contingency cover. Also imagine if a part of the GNPA is not written off, partially or fully, in subsequent years.
The entire amount of Rs 11-13 lakh crore plus banks' provisioning against it would be available and work to revive the lockdown-hit economy.
Two important facts should be kept in mind here: (i) the RBI routinely writes of NPAs even when it is wilful (those who can pay but don't are classified as "wilful defaulters"), letting private corporates routinely get away with public money and (ii) the public sector banks (PSBs) account for more than 80% of total GNPAs in the SCBs (86% in FY18), which are compensated (recapitalised) later with more public money. (For more read 'Rebooting Economy IX: Why is private sector dependent on public money in times of crisis? ')
Writing off NPAs is a double loss to the economy: (i) loss of public money (deposits) in the SCBs (Rs 11-13 lakh crore) and (ii) the subsequent recapitalisation of PSBs with more public money (to the extent the NPAs are written off).
Dire warning against growing debt across world
Even before the pandemic hit, the world was witnessing a phenomenal rise in debt against which multiple agencies were issuing warnings. The lockdown would surely be worsening it.
For example, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), warned on November 7, 2019, that the global debt - both public and private taken together - had reached an all-time high of $188 trillion or 230% of global output (GDP).
The IMF had organised a conference in Washington to discuss the development which she was addressing.
She cautioned: "Think of the devastating effects of unsustainable credit booms, including in the run-up to the global financial crisis (2007-08).A major driver of this build-up is the private sector, which currently makes up almost two-thirds of the total debt level."
She went on to explain: "But that is only part of the story...Remember: the build-up of public debt has a lot to do with the policy response to the 2008 financial crisis - when private debt moved to public balance sheets, especially in advanced economies. Recent IMF staff research shows that direct public support to financial institutions (banks and others) alone amounted to $1.6 trillion during the 2008 crisis."
Writing off NPAs (private businesses' loan defaults) by the RBI similarly shifts private debts to public accounts. India witnessed rapid lending in recent years - target-driven MUDRA loans and continuous lowering of interest rates that endured in the post-lockdown period. More than 90% of India's economic package of Rs 21 lakh crore consists of facilitating credit or liquidity infusion. (For more read 'Coronavirus Lockdown XVI: Why India should be wary of excessive push for liquidity or credit )
Here is the latest update on global and Indian debts.
The Washington-based Institute of International Finance (IIF), an association of financial industries, provides debt positions four times a year. Last updated in July 2020, its data is presented in the following graph, using only the debt position as on March 1 of every financial year.
The data shows, the total global debt stood at $258 trillion on March 1, 2020, which was 331% of the global output (GDP) - up from $184.4 or trillion 10 years earlier on March 1, 2010. Private sector debt accounted for 73% of the total GDP or $188 trillion (it includes household debt of $48.1 trillion).
What about India?
The IIF provides data for India only in terms of GDP, not in absolute value. Its data shows the total debt stood at 130% of the GDP in the January-March 2020 quarter. India's government debt stood at 69% of the GDP and that its private sector 61%. But that is only one part of the story.
Indian businesses show highest debt-stress level
The US management consultancy firm McKinsey & Company had warned about debt-stress in corporate entities in its July 2019 report, "Signs of stress in the Asian financial system".
It singled out countries like India, where it said the signal was "ominous" and called for monetary policy reviews and preventive actions.
The report showed India's corporate sector had the highest level of debt-stress in the world in 2017 with 43% of long-term loans facing potential default (interest coverage ratio of less than 1.5) - a rise of 30% from 2007. This is far more than 37% for China but India never attracted the kind of global attention China did.
It further pointed out that the corporate debt-stress was spread across sectors: industrial (capital goods, commercial professional services, transportation etc.), utilities, energy, real estate, and materials (in decreasing order).
Though this graph doesn't differentiate between public and private sector corporates, data from the bankruptcy proceedings (under the Insolvency and Bankruptcy Code) and other financial reports show that debt stress is predominant in the private sector.
The McKinsey report also highlighted a structural weakness in India's lending system that remains unaddressed as yet: high-risk lending by poorly regulated non-banking financial institutions (NBFCs).
It said: "In India, while (regulated) banks reduced lending as defaults showed signs of growing around 2014, nonbank financial intermediaries continued to lend. The Reserve Bank of India, India's central bank, estimates that 99.7 percent of nonbank finance companies (NBFCs) and housing companies make long-term loans against short-term funding."
That India's corporate debt-stress remains elevated has been flagged off by the global financial services agency Credit Suisse for at least three consecutive years since FY17.
It's "India Corporate Health Tracker" of August 2019 shows that barring a few, all familiar big private business houses figure in the list of 49 "chronically stressed" corporates (interest cover ratio of less than 1 for a period of 1 to 12 quarters).
The names include one or more entities belonging to the Reliance, Tata and Adani stables. A few are public sector entities, like the SAIL, MTNL, Shipping Corporation, Mangalore Refinery, Petrochemicals, and Chennai Petroleum. Debt stress is spread across sectors like infrastructure, manufacturing, telecom, power, metals, textiles, etc.
The debt of these 49 chronically stressed companies has been consistently rising from Rs 8.9 lakh crore in FY17 to Rs 9.1 lakh crore in FY 18 and Rs 10.2 lakh crore in FY19.
Why Indian corporates are debt-ridden?
The findings of the McKinsey and Credit Suisse reports raise many fundamental questions.
Why are India's big and apparently successful corporate entities debt-ridden? Why don't they use their own money - accumulated profits and wealth over the years -or infuse equity for establishing new businesses or expanding existing ones? Are they really stressed or is it a deliberate ploy to misappropriate public money?
The last question arises not only because the Indian government and RBI routinely write off corporate loans as NPAs (even if wilful) without question (the data is also kept hidden from public eye) but also because a series of corporate frauds have flooded out in the past couple of years: PMC, PNB, IL&FS, HDIL, DHFL, Yes Bank, ICICI-Videocon, and NSEL scams to name some.
Some of these scams reveal years of fraudulent financial dealings, others demonstrate outright loot of public money (for example, Nirav Modi, Mehul Choksi, Vijay Mallya, Jatin Mehta and many others fled India after pocketing public money).
In all, 36 such businessmen fled in recent years, the Enforcement Directorate (ED) told a court. With the Insolvency and Bankruptcy Code now diluted, the misappropriation of public money is more likely. (For more, read 'Rebooting Economy XI: Why are private companies so prone to financial frauds? ')
Leaving aside malfeasance, debt-driven businesses are a common phenomenon. With the economic slowdown, the chances of defaults are now heightened with an already debt-stressed corporate sector.
Moratorium and restructuring of loans are bad ideas
Should the RBI then continue lowering interest rates to push supply-driven-credit? The repo rate (rate at which the RBI lends to banks) has fallen from 6% in April 2018 to 3.5% in May 2020, the capital reserve ratio (CRR) is down to 3% for FY21 with no corresponding gain seen in the economy.
Most of the liquidity gets parked in the RBI's reverse repo account and it is well known to bankers and policymakers. In effect, the RBI and government know liquidity infusion is a spectacular failure and yet the push for more of the same continues.
A day after the IMF's Kristalina Georgieva warned against the growing global debt, the main speaker of the event Jeremy Stein, a Harvard professor, issued a dire warning.
His presentation read: "Supply-driven credit booms - accompanied by aggressive pricing and erosion of credit quality - appear to play a big role in fluctuations in economic activity across a wide range of sample periods, countries, and institutional arrangements."
It said such supply-side credit push brings "not just financial crises, but garden-variety recessions as well."
Not long ago, economist Joseph Stiglitz too had warned against supply-drive debt push: "...periods of rapid lending are often associated with bubbles like the tech bubble and the real estate bubbles in the US. (There is again typically a causal link: rapid lending helps create and sustain these bubbles.) Such bubbles make the assessment of risk more difficult."
Here is a warning from India's largest public sector bank SBI about extending moratorium on debt repayment.
On August 3, 2020, its research paper said: (i) 70% of the total moratorium have been availed by corporates which are rated A and above - those who can easily repay with "comfortable debt-equity ratio" (those with comfortable debt-equity are spread across sectors like pharma, FMCG, chemicals, healthcare, consumer durable, auto, etc.) and (ii) consumer loans declined by Rs 53,023 crore in the current fiscal, but "consumer leverage in lieu of exposure to stock market" increased by Rs 469 crore that could be a potential source of financial instability".
It warned that a blanket extension of moratorium beyond August 31 would "do more harm than good".
As for restructuring of bad loans that the government talks of, the IBC was brought in in 2018 precisely because the earlier regime of restructuring was a disaster and ended up ever-greening bad loans and caused higher losses as more good public money was thrown after bad money year after year.
Here is more food for thought.
How does India's economic growth square up with growth in bank loans?
The following graph presents data from the RBI and NSO for a period of 15 years (FY06 to FY20).
The correlation seems tenuous, doesn't it? Thereby hangs another tale.
No comments:
Post a Comment