INDIA’S biggest banks tend to have official-sounding names, worthy of a central bank. There is State Bank of India, Union Bank of India, Bank of India and even Central Bank of India (the actual central bank is called the Reserve Bank of India, or RBI). That is because, starting in 1969, the entire financial system was nationalised. Although the government has grudgingly permitted private-sector banks over the past 20 years, the 27 public-sector banks (PSBs), which are listed but majority-owned by the government, still account for 70% of lending. That is a worry, because the PSBs are in terrible shape, having lent freely to companies that cannot pay them back. In response, both the government and the RBI are imposing various reforms—but not the most obvious one.
Indian banks dodged the global financial meltdown in 2008. But they promptly embarked on a frenzy of lending to big companies, sowing the seeds of a home-made crisis. The PSBs gleefully funded infrastructure projects that never got the required permits, mines with an output made much less valuable by slumping commodity prices, and tycoons whose main qualification was friendship with government ministers. PSBs have tried to gloss over the problem for years, but the RBI is now forcing them to admit the true extent of the damage.
The reckoning has been brutal: 3 trillion rupees ($44 billion) of loans have been recognised as “non-performing” by banks in the past two quarters, the vast bulk of them at PSBs; 17% of all loans there have either been written off, provisioned for or categorised as impaired, according to Credit Suisse, a bank. More losses are in the pipeline. The revelations have driven the combined market capitalisation of the 27 PSBs down to that of a single well-run private lender, HDFC Bank, founded in 1994.
Tidying up a mess on this scale is never easy, but it is proving particularly tricky in India. The absence of a bankruptcy law (one was enacted in May but it will take months, if not years, to become operational) leaves bankers powerless in the face of defaults. Indian lenders recover just 25% of their money from delinquent borrowers on average, and only after four years of haggling, compared with 80% in America in half the time. A creaky judicial system piles delays upon delays.
Worse, as quasi-bureaucrats, Indian bankers are loth to do the one thing that would help a recovery, which is to sell iffy loans to outside investors and move on. Such investors exist, albeit in limited numbers, but doing business with them can be treacherous: if the borrower’s fortunes recover after a sale and it pays back the new owner of the loans in full, bankers fear government auditors will accuse them of selling the distressed loans on the cheap. Best for the bankers to do nothing, and hope that the situation somehow improves.
The government wants to change this dynamic. A new “bank board bureau”, headed by an unimpeachable former government auditor, has been created to insulate bankers from government meddling, and so give them cover to sell assets at less than face value. Much of what it suggests is sensible: giving longer terms to PSBs’ bosses, for example, and ensuring they are not judged merely on how quickly they increase the bank’s loan book—part of the reason the PSBs ran into trouble before. The government also wants to halve the number of PSBs through mergers.
CHINDIA ALERT: You'll be living in their world, very soon 