Four charts show how the bad loan problem of Indian banks is much bigger than Vijay Mallya

Will the king of good times turn into a pauper, now that he has left his throne? Vijay Mallya, the ex-chairman of United Spirits, the world’s second-largest spirits company, finds himself in deep trouble over unpaid debts which include over Rs 7,000 crore owed by the now-defunct Kingfisher Airlines to 17 banks.

These banks can reportedly recover only a paltry Rs 6 crore from the airline, and the State Bank of India has dragged the “wilful defaulter” Mallya to the Debt Recovery Tribunal in an attempt to recover more money by seizing his assets.

Will the bid be successful?

SBI has about Rs 1,600 crore of exposure out of the Rs 7,000 crore lent to Kingfisher by a consortium of banks, and the public sector bank is now trying every trick in the book to recover any of that money – hopes of which seem to be fading fast.

On Monday, the Tribunal froze Rs 515 crore severance pay package that Mallya was to get from Diageo, the company which bought Mallya’s UB Spirits last month.

How Mallya ended up here is an intriguing story of fortunes made and lost, but how a business entity which was doing well at one point subsequently ran into losses and ended up defaulting on thousands of crores of loans to the largest public sector bank in the country along with 16 other banks, is something of a mystery – unless you look at the numbers.

Not the only one

On Sunday, Vijay Mallya wrote an open letter where he said that he wasn’t the only one to be blamed for the unfolding mess which seeks to threaten the very premise of a strong banking system in the country.

Mallya argued that even SBI was culpable because the bank knew about his company’s financial position all along and yet lent to it. Moreover, Mallya pointed to the rising bad debts and stressed loans provided to businesses by banks across the industry and said that he was only being made the “poster boy” of bank defaults.

“In fact, banks have NPAs [non-performing assets] of Rs 11 trillion and have borrowers who owe much more than the amount allegedly owed by Kingfisher Airlines to the banks,” he wrote. “None of these large borrowers (whose debt is significantly more than the Kingfisher Airlines debt) have been declared wilful defaulters.”

What needs to be stressed is that SBI is only one of the 17 banks which lent to Kingfisher. In 2010, SBI was given ownership of all Kingfisher trademarks and goodwill to be sold off in case it ended up in a default. Now, however, the bank is unable to find any buyer for the same.

The company, according to reports, is now valued at a meagre Rs 6 crore as compared to a valuation of Rs 4,111 crore, according to a report by DNA.

Similar is the case with IDBI which reportedly lent money to Kingfisher while being fully aware of its financial condition and after being warned by some board members against the move. It has now resulted in bad debts amounting to Rs 700 crores from Kingfisher alone.

Breaking bad

While this might seem to be a curious one-off event of the banking sector failing to recover funds from what seemed like a financially well-to-do business at some point, it’s hardly rare.

As Mallya pointed out, most banks in the country are heavily debt-ridden and a substantial portion of this credit is unlikely to be recovered in the foreseeable future.

According to a report in the Indian Express in early February, banking bad debts (or loans recognised as unrecoverable through regular measures) stood at Rs 52,542 crore by March, 2015 – more than thrice the corresponding figure for March, 2012 (Rs 15,551 crore).

Consider how quickly the unrecoverable lending by public sector banks rose in the last few years. Between 2004-2012, bad debts rose by about 4% while they rose by a staggering 60% between 2013-2015.

To clear their financial statements of this rising debt burden, banks often follow a write-off process which shifts these debts off their balance sheets even though many of these loans continue to be reflected in respective statements of bank branches – and some of them might even manage to recover some of these debts.

The problem is so severe that the Reserve Bank of India Governor Raghuram Rajan has also been emphasising on the need to clean up balance sheets and performing a “deep surgery” on the balance sheets which will need an “anaesthetic” in the form of recognising NPAs on the financial books.

Between 2013-2015, twenty-nine public sector banks wrote off as much as Rs 1.14 lakh crore of bad debts. For instance, SBI alone declared loans worth Rs 21,313 crore as unrecoverable in 2015 compared to Rs 5,594 crore in 2014.

Deep surgery

Last month, a standing committee formed to look into the problem of bad loans and stressed assets in the banking sector submitted its report to Parliament. The report not only highlighted the speed at which bad loans seem to be growing, it also managed to make a larger point about the efficiency of public sector banks which seem to have lent much more loosely than their private sector counterparts.

The chart above shows how quickly non-performing assets in public sector banks rose more than five times to Rs 3.6 lakh crore in 2015 from just Rs 71,000 crore in 2011. A non-performing asset is one which stops generating income from a bank – such as loan instalments which aren’t being received or interest payments defaults for more than 90 days of due date.

As the NPAs in the banks rose, their quality of lending also seems to have worsened. The numbers show that more than 5% of all lending done by public sector banks was classified as NPAs by 2015 while the ratio was a mere 2.3% in 2011. It is also important to note here that this ratio has been falling since 2001 when it was 13.11% before it started rising in 2011.

The contention that public sector banks could have been more diligent while disbursing huge loans also becomes clearer from the above chart which shows how private sector banks have kept their net NPA ratio much lower than all other banks in the country. While nationalised banks had 3.45% NPAs out of their net lending in 2015, private banks kept the ratio to less than 1% even though it has risen over the years.

Applying band-aids

Reiterating that casually treating a structural problem of lending by the banks won’t be a long-term solution, Raghuram Rajan also said last month that the banks need to stop brushing the NPA issue under the carpet.

“If the bank wants to pretend that everything is alright with the loan, it can only apply band-aids – for any more drastic action would require NPA classification,” he said.

Last August, Finance Minister Arun Jaitley called the levels of NPAs in public sector banks “unacceptable” when he announced a Rs 70,000 crore compensation plan for these banks, spread over four years. In this budget too, Jaitley announced a package and stressed that the banks will have clean balance sheets by 2017 – which seems to be a case of wishful thinking.

This is so because recovery of loans is a major component of clearing NPAs which doesn’t have much to do with the budget as much as it has to do with individual banks taking all available legal recourse against the defaulters. While the SBI chief recently said that she will go all the way in bringing back the owed money, the record of public sector banks in recovering money or restructuring loans has been less than remarkable.

‘Stolen funds’

Deposing before the committee constituted to look into the matter, Rajan said that somewhere banks failed to fully predict the profitability and viability of infrastructure projects before providing them loans.

“There was inadequate project evaluation of assessment of promoter or management capacity or even financial capacity,” he said about projects which got shelved or stopped generating funds and hence their promoters defaulted. “We did not do a good job. Therefore, some of these projects have got into trouble.”

To help banks recover loans or a part thereof, there are legal measures available too. These include:

• Debt Recovery Tribunals which help banks resolve cases of seizure of property and assets for defaulters above Rs 10 lakhs expeditiously
• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act which allows banks to realise money from a lender’s assets without going through courts.
• For milder cases, there are Lok Adalats which help with arbitration and settlement.

The chart above shows that even though Lok Adalats and Debt Recovery Tribunals were able to realise as much as 30% of the amount on cases filed by banks in 2011, the ratio came down to a mere 18% in just four years. A time-series analysis shows that it was largely the efficiency of DRTs that came down from 21.5% in 2011 to 9.83% in 2014.

While the ministry claims that in absolute numbers, DRTs are disposing off many more cases than before and it is only because the number of cases has fallen that the ratio of realisation is dipping, it is evident that some ways are proving to be more effective than others in recovering lost money for the banks.

While the government tries to force banks into disclosing and recovering their bad loans, what Raghuram Rajan told the committee on the possibility of corruption and lax norms in lending seems to sum up the situation where funds are not only being “diverted” but “stolen” in public eye.

“We have to go after corrupt bank managements as well as corrupt promoters,” Rajan said. “There is no doubt that we need to do it. We do not have enough teeth. There are these promoters who have diverted funds. "Diverted fund" is a euphemism. I would say plainly that they have stolen the funds, and we cannot go after them. It takes too long.”