In tough times, Finance Ministry plans to crack down on loan defaulters.

It took at least three years, eight months and 12 days for state-owned banks to begin the recovery process after Vijay Mallya-promoted Kingfisher AirlinesBSE -4.93 % first flirted with default on its loans, which went through a half-hearted restructuring in April 2010.

That pales in comparison to the ultimate default — of the magnitude of Rs 7,500 crore, equivalent to last fiscal's national budget — under the Jawaharlal Nehru National Urban Renewal Mission for improving the conditions in the country's cities . That lethargy may now become history.

Times have changed and so have priorities. Finance Minister P Chidambaram is talking tough, at least publicly. His lieutenants echo his words.

The change in attitude at North Block seems to have bolstered courage in the board rooms of banks in the Bandra-Kurla Complex — the beehive of banking activity in the financial capital of Mumbai.

SS Mundra, who became the chairman and managing director of Bank of BarodaBSE 2.09 % on January 21 this year stunned his staffers, who were for decades used to bosses lecturing about growing loans and deposits. "The current scenario is not for aggressive growth and so the focus of the bank should be recovery and upgradation of bad loans and consolidation of business," Mundra told his colleagues at Bank of Baroda.


Gross non-performing assets (NPA) ratio of public sector banks increased 4.01% in September 2012 from 2.3% six months earlier. NPAs grew at 43.9% as on March 2012, far outpacing the credit growth of 16.3%.

Restructured assets under corporate debt restructuring are currently Rs 2,27,000 crore, 4.4% of the total banks' loan. The Reserve Bank estimates that if restructured loans turn bad, the overall bad loans in the system could double from current levels.

"They have realised that the market value of all security they hold and the loan outstanding should not reach an unhealthy level as many businesses are not getting capital-adjusted return on investment," says Robin Roy, PwC India's associate director for financial services.

Investors have turned negative on state-owned banks, thanks to their approach to rising bad loans. Moreover, their valuation gap with private banks such as Axis and ICICIBSE 2.00 % have widened substantially. These two private banks trade at double the valuation of Bank of Baroda or Bank of India.

"The balance sheets of SOE (state-owned enterprise) banks are weak — and are likely to remain so — impaired loans are close to double digits and large capital is required under Basel 3,'' say analysts at Morgan Stanley led by Anil Agarwal.

Part of the problem has been that the shadow of political masters always looms large over state-owned banks. Receiving intimidating phone calls from well-connected borrowers is a routine hazard for every chief executive in a government bank.


But that seems to be changing with the return of Chidambaram at the finance ministry. "We cannot have an affluent promoter and a sick company. Promoters must bring in money," Chidambaram said on March 18.

Source : economictimes.indiatimes.com