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A few days ago, I was invited to a rock concert at the State Bank of India. Yes, that's right,
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the SBI. At the concert, I was told a supergroup would be performing, consisting of musicians
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drawn from all the public sector banks of India. The concert was supposed to start at
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7 in the evening, and I got there at 7 to find that I was the only person there. Then eventually
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the arena filled up, and at 9pm the band finally got up on stage. It was a 7-man band. There was
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one singer, two guitarists, a bassist, a keyboardist, a saxophonist, and a drummer.
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A sound check happened, as men with safari suits got ready to headbang in the mosh pit.
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Then the band started playing. Or rather, two of the seven men in the band started playing.
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The saxophonist started doing pa pa pa, and the drummer was doing his own thing.
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The vocalist, the two guitarists, the bassist, and the keyboardist all stood around doing nothing.
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The men in safari suits in the mosh pit were all headbanging away to some imagined music.
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I turned and asked a fellow next to me, what's going on? Why are these chaps not doing anything
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on stage? He turned to me and replied, they are non-performing assets.
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Welcome to the Scene and the Unseen, our weekly podcast on economics, politics,
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and behavioral science. Please welcome your host, Amit Bhatma.
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Welcome to the Scene and the Unseen. Today's episode is about non-performing assets, or
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NPAs, as we call them. Now, all banks have bad loans, and they account for a certain amount of
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bad loans when they calculate business expenses. But in India, especially with public sector banks,
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NPAs have become a huge problem. To discuss this subject, I have with me today in the studio,
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Vivek Kaul, a columnist who writes for Equity Master and various other publications,
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and Kumar Anand, an economist based in Mumbai. Vivek, Kumar, welcome to the show.
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Happy to be here. Thanks, Amit, for having me. So,
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today's episode is on NPAs. What are NPAs? See, at a very basic level, without getting,
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you know, technical, any loan, which the borrower hasn't repaid for 90 days or more,
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is basically an NPA. Non-performing asset, it's an asset of the bank, and it's non-performing.
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There are various, you know, categories within that, but it's basically a bad loan.
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It's basically a bad loan. It's what it is. And Kumar, when we talk about the problem of
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NPAs in India, per se, I mean, NPAs are a problem everywhere, and, you know, banks account for it.
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You know, some of our loans will go bad, and they account for it in the cost of business.
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Why is it specifically a problem in India? As you rightly said, it's a problem everywhere.
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In India, what happens is that more than 70% of the banking is owned by the public sector,
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which is government-owned. And government is not in the business of maximizing profits as a private
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sector bank would. So, their intentions are completely different. Their goals are different.
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So, you're saying this NPA problem is really a public sector problem?
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So, you've written an article for us at, for the magazine praghati at thinkpragati.com,
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if any of the listeners are interested in checking it out, where Vivek, you'd spoken about
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the extent of the problem of NPAs in public sector banks. So, can you share some of those
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figures with us? So, basically, you know, what I had done was I had essentially taken the example
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of State Bank of India, which is by far the largest bank and the largest public sector bank in India.
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And I had looked at their, you know, bad loan numbers across different categories of loans.
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So, if you look at their, you know, bad loans in case of home loans, it's at 0.43%.
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In case of auto loans, it's at 0.65%. In case of retail loans as a whole, it's around 0.55%.
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But the moment you look at lending to industry, you know, where the quantum of the loan is
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very, very high, the bad loan rates tend to go up. So, if you look at, you know, lending to large
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corporates, the bad loan rates close to 7 to 8%. For mid-level corporates, it's close to 19%,
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which basically means that out of 100 rupees loans given to mid-level corporates, loans worth 20
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rupees have been defaulted on. So, the question here is that, you know, why is a public sector bank
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carrying out, you know, lending in a very good way when it comes to the retail borrower,
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but in a very screwed up way when it comes to the big industrial borrower.
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Now, if you compare, if you look at the overall bad loans rate of SBI, it's around 6.9%.
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Now, compare this to HDFC Bank. Their overall bad loans rate is just 1.1%.
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So, why is there such a significant difference? Is a question worth asking?
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So, I think the difference could be accounted for by the different incentives which are at play
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for an HDFC Bank versus an SBI. So, State Bank of India's incentive is not to maximize profits.
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While, I mean, in many of the stated government documents, they have said that their goals are
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big things like, you know, in financial inclusion or direction of credit into certain areas like
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MSMEs or agriculture. While HDFC, for them, the underlying thing, all the matters is,
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what is their profit? So, and which keeps them very, very disciplined. While on the other hand…
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Even beyond, like, even if SBI's stated intention was profit, if you actually look at the incentives
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in play, if you're an SBI employee, your job doesn't depend on your performance. It's a tenured
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position. You rise in the ranks according to seniority. It doesn't matter.
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Exactly. We have talked about…
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Whereas in HDFC, if you make a series of irresponsible decisions,
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that eventually goes into your record. You could lose your job. So, the incentives are very different.
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No, but see, the interesting, the difference here is, if you look at the default rates of
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retail loans in case of SBI, they're very, very low. So, it's not like… So, obviously, you know,
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the guys who are giving out the retail loans of SBI know their job well. Before they give out
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a retail loan, the due diligence is proper. So, to ask my question to you, why different
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default rates like for retail loans, for home loans, they're very standard? The public sector
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figures are not very different from the private sector figures in the case of bad loans. Why is
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it different in the case of industries? So, basically, you know, what you need to look
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at here is the fact that, you know, there's an economist called Thomas Sowell and he talks
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about this concept called knowledge and power. Now, in public sector, people who have the
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knowledge to make decisions do not always have the power to make a decision. Now, how does this work
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in the context of state bank? When a state bank employee is giving out a retail loan,
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he obviously is in a position to do proper due diligence and then decide whether the
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guy applying for a loan deserves a loan or not. Now, when the guy giving out a corporate loan
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does due diligence, I mean, he has the knowledge whether the particular borrower is in a position
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to repay or not. It's not that he does not have the knowledge. It's just that he does not have
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the power to make the decision whether that guy deserves a loan or not because, you know,
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a lot of these guys, large corporates are essentially crony capitalists who are close
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to politicians. So, if their loans are not cleared, the state bank of India, you know,
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employ runs the risk of sort of being transferred to, you know, one of the, you know, states which
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are probably very, very far away from cities like Delhi or Bombay where all the action is.
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So, that's the fundamental problem, you know, of knowledge and power. The other thing is,
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you know, you can unleash your lawyers or your system on the small borrower. You cannot unleash
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the lawyers on a large borrower because the large borrower has access to a better lawyer than…
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And to political protection.
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And political protection.
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So, basically, to sum it up, if I'm an HDFC manager, I have both knowledge and power. I
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do my due diligence and, you know, I get the knowledge that I get out of the market and out
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of, you know, looking at people's credit records and so on and so forth. I also have the power.
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If I want to deny him a loan, I can. But your point is that in the public sector banks,
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many of these big loans are politically influenced.
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So, in fact, you know, what also happens is a lot of these big guys who borrow,
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in fact, in sectors like power and steel, padded up their costs. So, what they did was when they
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padded up their costs, they ended up borrowing more than what they needed. And they themselves
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brought very little of their own money into the venture. And the moment they got the loan,
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they essentially siphoned off, you know, the extra part of the loan and used that money to pay off
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the, you know, their own money that they had put into the venture. So, that way they had very little
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Sounds like a classic Ponzi scheme.
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And probably contributed to the politicians' coffers as well.
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Yeah, I mean, all that goes on set.
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Money goes towards power, power goes into making money. And again, to clarify,
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a private sector bank would be far less likely to give those kind of loans where you could
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scheme off a lot extra on the top, simply because their incentives are tailored towards
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Just to going back to the point of incentives, the public sector banks, the biggest owner is
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the government. And the politicians who run the government, their incentive is re-election.
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While in the case of private sector bank, the incentive is to maximize profits.
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Right, so the politician comes to power because he has been funded by different
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interest groups or crony capitalists, and he then rewards them by using the power he has in
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government in various ways, one of which is these kind of soft loans from public sector banks,
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which later become NPAs. And who suffers here, most of all?
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All of us, we poor janta. So, going, you know, so this whole NPA problem, and again, as you
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specified, it's really a public sector bank problem. What are the unseen effects of it?
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One of the things which comes to mind immediately is that the case of moral hazard.
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So, you know, the unseen effect, the first unseen effect is moral hazard. I mean, if you look at
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a lot of corporates who are defaulting now or who are in major trouble are essentially the
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same guys who had defaulted in the late to mid 90s. Now, and this time around, they have defaulted,
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you know, substantially larger amounts. So, obviously, you know, they know how the system
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works. I mean, there is no other reason as to, you know, why they would have, you know,
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defaulted in the late 90s and defaulted larger amounts again, you know, over the last few years.
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So, there is a great moral hazard at work. The other thing that happens is that, you know,
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it pushes up interest rates for the borrowers. Now, how does that happen? I mean, you look at
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the RBI, you know, the Reserve Bank of India cuts the repo rate and sends a message down to all the
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banks that guys, you need to sort of start cutting your loan rates. Now, what the banks do is they
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cut their deposit rates, but they don't cut their loan rates because the bad loans are going up. So,
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they try to sort of cushion that by increasing the margin between the rate at which they borrow
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and the rate at which they lend. Now, when the rate at which they lend remains the same,
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then the entire act of the Reserve Bank, you know, cutting the repo rate and signaling lower
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interest rates goes for a toss. The other thing that happens is and this is something that,
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you know, Raghuram Rajan when he was the governor of the Reserve Bank of India made in a speech
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and he made a very interesting example of how, you know, a home loan borrower in India paid an
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average rate of interest of 10 to 10 and a half percent, whereas an average power company paid,
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you know, an interest rate of 13.5 percent, you know. So, an individual was borrowing at a rate
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which was close to 300 basis points lower than a power company. You know, what was happening there
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was that, you know, many power companies were essentially defaulting on their loans. So,
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those who were repaying their loans on time were essentially paying a higher rate of interest. So,
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in a way, they were compensating to some extent for the guys who were defaulting on their loans.
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It's like the owners subsidizing the dishonest.
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Very, very true. I mean, that's a very, you know, nice way of summarizing it.
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And of course, the third unseen effect is the opportunity cost. So, all the money which
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politician running a public sector bank awards it to his cronies or what's as a
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favor to his people who have financed their campaign or such things would have been used
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for other productive purposes, but those are now lost. So, essentially, if my tax money had stayed
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with me instead of being spent on all of this, I would have gone out and spent it in the economy,
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would have grown in that way in more productive, positive some ways. So, Vivek, that's the problem.
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What are the solutions? Like, what would you do to turn things around?
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So, you know, today in the business standard, there was a very interesting article which said
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that the government is encouraging five public sector banks to tap funds from the stock market.
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Obviously, you know, whether the stock market is willing to give them funds is a very, you know,
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it's a different issue, but at least the government is encouraging, you know, banks to sort of tap
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and get money from the stock market. So, that is a step in the right direction.
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The question which the story did not answer was whether the government is willing to dilute its
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stake below 51 percent if, because the amount of capital that these banks require in the years to
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come, especially with Basel III, you know, also coming in, is going to be huge. Now, to give you
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some numbers, there was one research paper co-authored by Viral Acharya, who is now one
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of the deputy governors of the RBI and he has various sort of scenarios and in one scenario,
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he and his co-author estimate that close to 10 lakh crore will be required to recapitalize
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these banks. Now, 10 lakh crore to give you some sense, you know, of how big the number is,
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is around twice the fiscal deficit that the government of India will run this year.
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So, the question is where will this sort of money come from? I mean, there are other estimates which
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are not as high as this estimate. I mean, there is one another estimate of around 5,87,000 crores.
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Now, whatever, I mean, whether it's 5 lakh crores or it's 10 lakh crores,
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it's a huge number which the government cannot generate. So, the solution ultimately is to
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gradually prioritize these banks. Now, whether the government is willing to dilute its stake below
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51 percent is the billion dollar question here. And that's kind of the crux because the incentives
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are so messed up because the government is in control. Unless they are independent and the
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incentives are actually to seek profit, this problem isn't going to sort itself out. And see,
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the other thing is that, you know, they think that, you know, public sector banks are needed
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to run a lot of these social sector schemes, which is fair. But then having said that,
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there is no need for the government to be running, you know, 20 odd banks. I mean, you can have
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five banks. You don't need to own 20 banks. I don't think even to run those schemes,
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you need to have banks. I mean, governments all around the world have public schemes,
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but for them, they don't need to own banks. I agree with you on that point. My point is,
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you know, a lot of ideas which are economically feasible are not politically feasible. So,
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for an idea to be politically, I mean, I thought I am giving a politically feasible idea wherein,
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okay, you know, you want to own the State Bank of India. Fair enough. You own the State Bank of
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India. You own four other big banks, which are, you know, let's say one big bank in South India,
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one in West, one in North, one in East. You don't have to own 20 odd banks and, you know, essentially,
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you know, make the taxpayer poorer every year. I mean, there is no reason for you to do that.
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By the way, if I recall correctly, the stated objective of Government of India is never to
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dilute its share in any government enterprise under 51%, especially particularly banks.
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So, I think in case of banks, there is some, I mean, constitutional amendment which needs to be made
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if they want the equity to go below 33%. Wow, so it's essentially unlikely to happen
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and we're just going to have the same sorry situation perpetuate itself. Or the taxpayer will
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sort of pick up the bill gradually over the years. I'm feeling really proud of myself. How much have
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I done for this government over the years, Vivek? Same here. Thank you for coming on the show. We
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now need to head out of this frivolous podcast and do some more work because hey, who's going
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to fund those NPAs? Let's get on with it. If you enjoyed the show, do head over to the online
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magazine and check out Vivek's piece written in May this year, titled The Separation of Knowledge
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and Power. Vivek and Kumar have both been guests before in the Scene and the Unseen and you can
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check out our archives at sceneunseen.in. Goodbye for now. If you enjoyed listening to the Scene and the Unseen,
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check out another great show by IVM Podcast, Made in India, hosted by my friend May Thomas,
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where every week she profiles up-and-coming independent Indian bands.
