Corporate debt write-offs: privatising profits, socialising losses

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[00:00:32] Hello and welcome to All Indians Matter. I am Ashraf Engineer. Indian banks had written off bad loans worth Rs 14.56 lakh crore in the 9 financial years starting 2014-15. Of these, the loans written off to large industries and services stood at Rs 7.4 lakh crore. Between April 2014 and March 2023, scheduled commercial banks had recovered an aggregate of only Rs 2.04 lakh crore in written off loans, including corporate loans.

[00:00:59] Not too long ago, there were serious worries over the writing off or waiving of large corporate loans and the impact that would have on the banking system as well as the economy as a whole. A lot has happened since then and this issue is not discussed a lot these days. Many believe the situation has stabilized while others think it's a dormant volcano waiting to erupt. What I am hoping to do through this episode is put the issue in perspective to explore what it could mean for you and me.

[00:01:24] Why should you care about corporate loan write-offs? Mainly because it's your money that is being lent out and not recovered. If banks go under because of these unrealized loans, it's not the large corporations that suffer, but common citizens like you and me. All Indians matter. A corporate loan waiver is the government or the banks forgiving the debts of usually large businesses.

[00:01:51] This is often justified as necessary to improve the banks' financial situation and to stimulate economic activity. However, the negatives far outweigh the positives. For one such, waivers increase the fiscal deficit and government debt. This reduces the money available for social welfare and development programs. The burden of government debt is borne by taxpayers and we now also have to make do with fewer public services. Large loan waivers distort the market, handing corporate houses an unfair advantage.

[00:02:18] They not only access cheap credit, they avoid accountability too. Micro, small and medium-sized enterprises meanwhile get no such relaxations and they have to pay higher interest rates to make up for the loss caused by the waivers. These costs are then passed on to the customers. It's a process that reeks of corruption, has no moral root and creates a situation in which borrowers feel no need to repay loans and lenders feel there is no incentive to recover them. This affects the trust in the banking system as well as its stability and by extension that of the entire economy.

[00:02:48] To be clear, I do believe that a lot has been done on this front, but I also believe that too many large business houses have been allowed to get away with not paying back what they borrowed. To put this in perspective, we must understand the major changes the Indian credit landscape has undergone in the last few years. Credit after all is the lifeblood of any economic system, so the changes in this space also have a bearing on economic growth and stability.

[00:03:09] The banking sector has been grappling with the crisis of rapidly rising non-performing assets or NPAs for several years before the COVID-19 pandemic hit. They were triggered by large-scale corporate defaults. By FY 2017-18, gross NPAs in India had reached roughly 14% of total loans, the highest among emerging economies. This forced a series of steps that included bank recapitalization, a new insolvency and bankruptcy code and banks developing a heightened aversion to risk.

[00:03:37] The large infusion of capital into state-owned banks helped strengthen their balance sheets. While this meant that banks are in a relatively better position today, other debt sources now play a crucial role too. These include bonds and non-banking financial corporations or NBFCs. More on that in a bit. But first, as banks get more cautious about corporate credit, we are witnessing the consumerization of bank credit. In FY 2010-11, the share of consumer credit and total bank credit was only 19%. By FY 2023-24, it was 33%.

[00:04:07] This is not great because almost half of it is unsecured or secured against weak collateral. This makes it quite risky. Banks seem to have traded one kind of risk for another. In the same period, the share of industry in bank credit fell from 44% to 28%. This could also be due to weaker credit demand on the back of slowing industrial growth. Indeed, private sector investment remains sluggish even today. Proof that the economy has not fully recovered from COVID-19 comes in the form of banks struggling to raise deposits.

[00:04:36] Deposit growth is well behind credit growth perhaps because household savings as a share of GDP fell from 7.2% in FY 2021-22 to 5.1% in FY 22-23. This is indicative also of the ballooning cost of living and India not generating enough jobs. The other trend is that household savings are moving to alternative investment options, such as mutual funds and stocks. National stock exchange numbers show that the number of registered equity investors

[00:05:02] crossed 90 million in February 2024, most of them retail investors. As they hit a bank hurdle, businesses are turning to other means of raising money, such as bonds, as I said earlier. A corporate bond is a debt instrument that a company issues to raise money from investors. The bondholder lends money to the company in exchange for interest payments and return of the original investment when the bond matures. Between FY 2010-11 and FY 2023-24, the share of bonds in non-government credit grows from 14% to 21%.

[00:05:31] This growth has outpaced bank credit growth. Between FY 2018-19 and FY 2023-24, bank credit grew 12% while corporate bond issuances grew 13%. A private credit market seems to be thriving now through alternative investment funds or AIFs too. According to the Prime database, annual credit extended by AIFs grows from Rs 15,000 crore in FY 2018-19 to Rs 66,600 crore in FY 2023-24. That's 37% growth per year.

[00:06:00] AIFs raise money from institutions, domestic and global, as well as from high net worth individuals and lend it to low-rated firms rated A to BB. The public bond market in comparison enables only high-rated firms to issue bonds. AIFs are an alternative source of credit for smaller and low-rated firms that can't get loans from banks. So exactly how serious is India's corporate debt problem? It is generally accepted that India's corporate debt relative to its GDP is lower than that of several major economies. However, it's the quality of the debt that is a worry.

[00:06:29] It is poorer with a large number of indebted firms unable to repay their loans. As I explained earlier, that leaves banks holding massive NPAs. Many believe it's a manufactured crisis because banks were forced to loan large amounts to corporations which had no intention of paying them back. By the end of 2018, NPAs stood at more than $150 billion threatening the very survival of public sector banks. Roughly 82% of these NPAs were in the form of corporate loans. This points to a nexus between corporations, bank managements,

[00:06:58] bureaucrats and politicians and that is what has been bleeding your bank account. As I said, it's your money that was lent to defaulters and never recovered. Many analysts have suggested that all public sector banks be privatized but that's hardly a panacea. Private banks have faced rising NPAs too and these include the likes of ICICI Bank, Axis Bank and Yes Bank. In some cases, their leaders have had to quit unceremoniously or have been removed from their posts for corrupt practices. A large chunk of these write-offs have come while the Narendra Modi government has been in power.

[00:07:27] So, it's not surprising that the matter has taken a political turn. In April 2024, Congress leader Rahul Gandhi claimed Prime Minister Modi had waved off loans to his billionaire friends to the tune of Rs 16 lakh crore. He said this money could have been used to generate jobs, wave off farm loans and provide gas cylinders at Rs 400 for 20 years. He also claimed that with this amount the government could have borne the expenses of the Indian army for 3 years. He added that education up to graduation could have been made free of cost for every youth from the Dalit,

[00:07:56] tribal and backward communities. The government has responded to rising NPAs through various steps. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 was amended to make it more effective. The pecuniary jurisdiction of debt recovery in tribunals was raised from Rs 10 lakh to Rs 20 lakh to enable them to focus on high-value cases resulting in higher recovery. The National Asset Reconstruction

[00:08:19] Company Limited or NARCL, also known as the BAD Bank, was set up to resolve stressed assets above Rs 500 crore. The government also approved extending a guarantee of up to Rs 30,600 crore to back security receipts issued by NARCL to lending institutions for acquiring stressed loan assets. But let's understand one thing before anything else. Corporate houses cannot willfully default on loans without strong political support. Indeed, banks have historically found it almost impossible

[00:08:48] to recover loans from those with political connections. Such borrowers keep taking loans certain that the loss will ultimately be borne by taxpayers. Think of it as privatizing gains while socializing losses. If India allows bad corporate debt to mount, the outbreak could turn into a contagion because the lure of cheap credit at a time when profits are falling may prove too much to resist. It would seem India's credit ecosystem is at an inflection point. The trends I discussed are poised to reshape the credit landscape having widespread implications for economic growth.

[00:09:16] It will require a radically new regulatory and policy approach. But more than that, it will require the loosening of the grip that politicians and large corporate houses have on banks.