In the last two years, public sector banks have come in for scathing criticism after RBI’s Asset Quality Review revealed large-scale ever-greening of loans and excessive exposures to debt-heavy members of India Inc. Now it transpires that private sector banks have been guilty of similar practices, albeit to a lesser degree. Over the last few quarters, as the AQR-related surprises have abated, PSBs have been able to report lower net NPA accretions. But private banks have shocked the markets with manifold jumps in their bad loans. New skeletons have come tumbling out of private lenders’ closets after RBI’s annual risk-based supervision exercise unearthed significant under-reporting of bad loans in their books over FY16 and FY17.
The numbers are not small and result in significantly higher bad loan ratios and provisions for these banks. For instance, Axis Bank has so far reported NPA ‘divergence’ (euphemism for under-reporting) of ₹4,867 crore for FY17 and ₹9,478 crore for FY16. Yes Bank has disclosed a difference of ₹6,355 crore for FY17 and ₹4,176 crore for the previous year and ICICI Bank admitted to an anomaly of ₹5,100 crore in FY16. True, even after accounting for the revised numbers, the financials of these private banks in terms of gross NPAs, growth and profits, present a far better picture than for some PSBs. But then, the ‘divergence’ saga of private banks raises prickly questions about their lending and accounting practices, which need answering. For one, given that RBI’s definition of what constitutes a standard asset or an NPA is quite clear, what was the accounting ambiguity that allowed the treatment of bad loans as prime assets? And how did this slip under the radar of the banks’ statutory auditors? Two, given that the bulk of these NPAs pertain to legacy loans, why were they not evident during the AQR exercise? If private banks are guilty of ever-greening, then are their credit appraisal and risk control systems any better than those of PSBs? Three, investors have all along believed that the bad loan problems of PSBs are owed in large part to political interference and the lack of accountability of their top managers on lending decisions. But given that private banks are not subject to any such interference and are professionally managed, what explains their risky exposures? In fact, in light of the yawning pay gaps between the top managers of private sector banks and PSBs, it now needs to be assessed if the compensation packages at the former unduly incentivise short-term results.
The realisation that corporate defaults are a pervasive and recurring feature of project lending in India also calls for detailed investigation. Knowing what proportion of the NPA stockpile was created by the economic downturn, by corporate miscalculation and through sheer misgovernance is critical to finding fool-proof solutions for the future. Therefore, apart from focussing on NPA resolution, the RBI and the Centre must initiate a forensic investigation into the root causes of this NPA imbroglio.