Budget 2014-15: Chidu fiddles as bad loans burn banks

R Jagannathan  F P  !7 Feb 14

The finance minister offered duty reliefs for some of the economy’s beleaguered sectors—capital goods, bikes, autos, SUVs, etc.—but the most glaring omission in his budget speech was the relief he failed to offer in his own backyard: bleeding banks.

Indian banks are bleeding under the weight of huge bad loans. Between acknowledged bad loans and loans that have been ever-greened (that is regularised by a restructuring of the terms of repayment), it is estimated that upto a quarter of bank loans are under stress.

Uday Kotak of Kotak Mahindra Bank believes that Rs 10 lakh crore out of total advances of four times that level could be stressed, and banks may have to write off upto Rs 3,50,000-4,00,000 crore of this over the next few years. One public sector bank, United Bank of India (UBI), is already on the brink, with gross bad loans at over 10.8 percent of advances, and the Reserve Bank placing curbs on the bank’s ability to lend more without serious collateral.

But what is Chidambaram’s response to this building crisis?

He has sprinkled some holy water and announced that he will recapitalise banks to the extent of Rs 11,200 crore. This is even lower than last year’s amount of Rs 14,000 crore, when the extent of bad loans was far less serious. Clearly, even as a full-fledged banking crisis is staring us in the face, Chidambaram has decided to ignore it and pretend that it is business as usual. A Rs 10,00,000 crore stressed assets problem is being palmed off with just Rs 11,200 crore of recap funds.

All he had to say on the oncoming crisis is this: "Banks are under strain owing to rising non-performing assets. Bankers have assured me that as the economy turns they will be able to contain the NPAs, recover more loans, and build healthier balance sheets."

So their assurance is all that is required of the man who presides over three-quarters of the banking system – the public sector part of it?

Blithely ignoring the crisis, Chidambaram happily announced further plans to increase bank credit to the agriculture sector. He said: "This year banks will exceed the target of Rs 7,00,000 crore of agricultural credit. I am, therefore, encouraged to set a target of Rs 8,00,000 crore for 2014-15."

How is all this going to happen without fresh infusions of large amounts of new capital?

It is clear that the finance minister either expects the Life Insurance Corporation (LIC) to keep investing in banks to recapitalise them—as has been done last year and will probably be done this year too—or he does not expect to be around after May 2014 to grapple with this issue.

Since Chidambaram tried to put a positive spin on everything in his budget speech, he probably did not want to focus on the real issues roiling the banking sector. He has wished it away.