NPA: State-run banks’ Air India moment not far

Ministers’ decibel level on the state and fate of Air India is rising. The writing is on the wall – its future is bleak so there’s no point in throwing tax payers’ money down the drain. Its debt is at Rs 60,000 crore; accumulated losses at Rs 40,000 crore; projected a cash deficit of Rs 3,000. Its operating profit for fiscal 2016 was Rs 105 crore when annual interest payments is at Rs 4,000 crore.

A trainee banker will tell you it can’t survive in the present form. What went wrong with the Maharaja?

The answer depends on whom you ask. There are numerous reasons thrown at you. But broadly they are three — buying planes for Rs 45,000 crore when the global norm was to lease; merger of a company that flew domestic passengers with the one that flew people overseas; doling out lucrative seat share to international peers.

The motives behind these decisions are being probed for possible malfeasance. The truth is that the Maharaja is crippled.

Civil Aviation Minister Ashok Gajapathi Raju summed up the state of affairs: “Business as-usual is not an option. Taxpayers’ money cannot be committed for an eternity.”

Wisdom that propping up a failed enterprise is a drain on state’s finite resources has arrived a bit late. Nevertheless, ministers talking such language keeps hopes alive that all is not lost. It won’t be an exaggeration to say that more than half the staterun banks are in the same ward as the Maharaja is.

Losses at state-run banks in the April quarter was Rs 10,000 crore, the amount government plans to hand out to them as capital this year, says Ashish Gupta of Credit Suisse.

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The spike in bad loans has led to nearly 16 of the 21 state-run banks qualifying for the hall of shame — Prompt Corrective Action, a sign of imminent collapse without urgent action. When capital erodes and bad loans surge, under the PCA, the Reserve Bank of India orders them to stop lending and focus on recovery. Its effectiveness is debatable.

The bank can’t lend to a good client who is prompt in payments. The defaulter is on the run. In a way the PCA worsens a bank’s operations. Indian Overseas Bank and IDBI Bank are already in the intensive care unit. Oriental Bank, Bank of India, Dena Bank and some others are headed there. Gross bad loans are at 10% of total. Stressed loans, which include defaults and restructured accounts, are at 12%. Save for state ownership, serpentine queues in front of banks to pull out deposits like in post-Lehman Ireland and Iceland would have been the normal.

But the state funding has limits too. Ironically, many state banks can’t tap public markets as law mandates 51% government ownership. Government tightening purse strings due to poor performance is a good first step, but not sufficient. The state can take a leaf out of the books of Tatas and Birlas who control firms like Tata Steel and Hindalco with less than 51%. If they can, why not the all-powerful government?

Air India is not the first one to sink. Many jewels of the past have either rusted or faded into oblivion — HMT, BSNL, MTNL, Hindustan Photo Films, Scooters India.

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Minister Raju is blunt when it comes to finding a buyer for Air India: “There are hardly any bakras (scapegoats) around, so to get one is difficult and businessmen are businessmen.”

It may be no different for banks. Just like Air India lost out to IndiGo, Jet and SpiceJet, government-owned banks are losing out to HDFC Banks and IndusInds. All new loan growth last fiscal came from private sector banks, says Credit Suisse. Their market share in total loans has risen to 27%, from 20% in second quarter of 2014, and deposits’ share is at 23%, up from 18%.

If the government doesn’t facilitate private capital in banks soon by scrapping the 51% floor, there may be no bakras left in a few years to palm off banks either.

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