Crony capitalism, kritarchy, and India's banking sector

Livemint has a good summary of the problems facing India's banks,

Collectively, 39 listed banks have posted a profit of Rs.307 crore in the December quarter against Rs.16,807 crore in the year earlier and Rs.17,411 crore in the three months ended 30 September 2015... For the entire banking system, provisions rose from Rs.23,646 crore to Rs.49,017 crore. State-run banks... gross non-performing assets (NPAs) rose close to Rs.1.3 trillion in just one quarter, between September and December—from Rs.2.62 trillion to Rs.3.93 trillion. For all publicly traded banks, the rise has been close to a trillion in a quarter—from Rs.3.4 trillion to Rs.4.38 trillion. If we compare this with the year-ago period, then the gross NPAs have risen by almost 50% for the industry, from Rs.2.92 trillion in December 2014. After provisions, net NPAs of the Indian banking industry in the December quarter crossed Rs.2.5 trillion, about 48% higher over December 2014. The state-run banks account for more than 90% of this—Rs.2.31 trillion... Fifteen Indian banks now have at least 7% and up to 12.64% gross NPAs and only one of them is from the private sector (Dhanlaxmi Bank Ltd, 9.69%). 

The aggregate solvency ratio, net NPA to net worth, of 19 public sector banks rose from 35.8% to 45.3% from the first to third quarter of 2015-16 fiscal year, far below the 15-20% acceptable rates. The provision coverage ratio has slipped to 43% and the Credit Suisse estimates the gross NPAs to rise to 6.6% by March 2016. The RBI has given banks two quarters to recognize and provision for all their NPAs. It is being estimated that the gross NPAs could rise to about Rs 5.5 lakh Cr from Rs 3.5 lakh Cr at the end of second quarter of 2015-16. All this is apart from the problem of disposing off the assets taken up under the Strategic Debt Restructuring (SDR) by 31st March 2017, and the potential losses in the 5:25 takeout scheme.

As banking sector woes mount in India, the Indian Express writes,

According to RBI estimates, the top 30 loan defaulters currently account for one-third of the total gross NPAs of PSBs. Till March 31, 2015, the country’s top five PSBs had outstandings of Rs 4.87 lakh crore to just 44 borrowers, if borrowers were to be categorised in terms of those having outstandings of over Rs 5,000 crore

The RBI Deputy Governor SS Mundra made a presentation on the mounting NPA problem, which had the graphic below on the distribution of bad loans based on category of borrowers,

It is clear that India's banks have a problem with lending and recovering from its largest clients. That the banks are able to efficiently manage operations with its 'riskiest' and largest group of borrowers (agriculture and micro enterprises) bears some testament to the strength of its general due-diligence and recovery mechanisms. But somehow, this systemic strength breaks down with its largest clients. It is hard to not avoid coming away with the impression that crony capitalism is the contributor. Or is it so that the small borrowers are more credit-worthy (or less unscrupulous) than the bigger ones in India's context!

And in the latest example of cowboy justice, the Supreme Court, taking cognizance of newspaper reports, expanded the scope of an ongoing PIL and directed the RBI to furnish the list of all defaulters with due more than Rs 500 Cr. Now, this is not as cut and dry a case as it would appear to those newspapers. When markets are spooked, it may not exactly be a good idea to go the full hog with transparency and reveal all the bad news, especially if the firm faces a liquidity, and not solvency, problem (as would be the case with a delayed project, which has soaked up debt and is not generating cashflow). 

It is for this reason that TARP in the US was implemented without disclosing information on which bank was accessing various credit windows. In fact, even revealing information about which bank was getting assistance from the Treasury or the Federal Reserve was considered systemically unhealthy. The results of the stress tests done at the height of the sub-prime crisis, which are otherwise on the public domain, were not disclosed. Such information have the potential to trigger runs on financial institutions and contagion on the financial market itself, with the effect of turning a liquidity problem into a solvency crisis. 

It is surely beyond the Honorable Supreme Court's competence to adjudicate on such decisions. And, unlike a few recent cases, it cannot withdraw its orders without having caused considerable economic damage.