Why Not Restructure Farmers Loans Too?

Pretty damning coming from a banker.  Why no ‘CDR’ for farm loans?

But as our public policy discourse and chat-shows are predominantly urban and corporate-oriented, these [farmer] suicides have neither shocked nor shamed the policy-making establishment. That includes even the banking sector. Anybody with anything to do with this sector ought to feel vicariously culpable in the withering away of so many lives on this issue.

CORPORATES FAVOURED

This casual indifference is in marked contrast to the way corporate indebtedness is grabbing all the attention and focus, what with the travails of sectors such as aviation being played up in the media. The humdrum farm sector does not have the same glamour quotient and is, therefore, condemned to be the poor country-cousin in any national-level discussion.

The media, including the financial dailies, is no less guilty here, as there is little attempt on its part to go into the details of individual farmer suicides or see it as a reflection of the state of our agriculture.

The lopsidedness of our policy priorities comes out clearly when one looks at the kind of efforts being made at addressing financial distress in the corporate sector.

According to reports, the first half of the current fiscal alone (April to September) has seen restructuring of corporate loans totalling some Rs 34,560 crore under the Corporate Debt Restructuring (CDR) mechanism. And this does not include the mega liabilities owed by the big airline companies. 

The important thing here is that there is an established Reserve Bank of India-approved mechanism when it comes to dealing with issues of corporate loan delinquencies.

These involve extended moratoriums (during which no repayments at all need to be made), elongation of the repayment period itself up to 10 years, reduced rates of interest, provision of ‘funded' interest term loans to those unable to service even the interest component, conversion of cash losses on working capital into term loans, additional finance, and even conversion of debt to equity.

It is quite the opposite in respect of agricultural debt relief. Although there are serious systemic issues plaguing the farm sector, problems of indebtedness meet with sporadic or knee-jerk response at best. And whenever a relief package is announced, it tends to go to the other extreme of fostering or encouraging a culture of non-repayment, that too, among people with a credit morality much higher than those in the corporate sector. We have seen this happen even in the course of the Agriculture Debt Waiver and Debt Relief Scheme of 2008.

What the agriculture sector actually requires is not one-time waivers and write-offs as much as an institutionalised structure similar to the CDR mechanism, so that lenders have a regulator-approved route map ready when they deal with the problem of a farmer unable to service debt. 

The Kingfisher Scam?

I wrote about public sector banks shoveling money to the telecom operators in this post:  The 3G Scam?.  Now we read this:  Kingfisher Airlines is NPA for us, says SBI chief.

New Delhi, Jan. 5:  

The State Bank of India said Mr Vijay Mallya-promoted Kingfisher Airlines has turned a non-performing asset (NPA).

“Kingfisher is an NPA for us. They are in default,” Mr Pratip Chaudhuri, SBI Chairman, told reporters here on Thursday.

SBI is the lead bank in the consortium that has funded this private airline. The country's largest commercial bank has an exposure of Rs 1,458 crore to Kingfisher Airlines, which is in a weak financial position and struggling to service its loans.

The other banks with significant exposure to Kingfisher Airlines are IDBI Bank at Rs 727 crore, Punjab National Bank (Rs 710 crore), Bank of India (Rs 575 crore) and Bank of Baroda (Rs 537 crore).

Just add up those numbers:  Rs 4000 crores has been given by our public sector banks to one private company which has blown it away.  The biggest bank has already declared its loan as an NPA.  Is this any different from a scam?

When will RBI make it mandatory for banks to reveal the full details of their NPAs and who owes them the money?

Airline Woes

Airlines hit turbulence:

The ATF prices are very high in India because states levy sales tax or VAT on ATF between 23 to 35 per cent. Being a state subject for tax, the Centre cannot control ATF prices or make them uniform. Airlines complain that ATF prices in India are almost double than that of global rates and account for 40 to 45 per cent of operational expenses compared to 18 to 20 per cent abroad. In fact, compared to a country like Singapore, ATF prices in some states in India is almost 70 per cent higher, they say. Another factor that drives costs up is high salaries for pilots and crew members. Though, after the recession in 2009, salaries did not move up rapidly, wage cost for airlines is still very high.

How about salaries?  Do these airlines pay as much as airlines in other countries?  I think not.  And what about all those sweet loans from obliging PSU banks?  SBI for instance has the highest exposure to Kingfisher - about Rs 1,400 crores (SBI asks Kingfisher to raise fresh equity before debt recast).

Or maybe the problem is elsewhere?

Yet another reason cited for the losses is the overcapacity in the sky. In the last one year or so, airlines leased more aircraft, added many more seats, opened new routes and increased frequency in the metro routes. The net result was that with more seats on offer and dynamic online pricing system, yield per seat nosedived. Points out SpiceJet spokesperson: “The pricing environment continued to be weak, resulting in a decline in the average passenger yields in the September quarter by 5 per cent to Rs 3,317.” He says that with increased capacities getting inducted, load factor during the quarter was also down to 67 per cent from 74 per cent during the same period last year. With the creation of large capacity, airlines are finding it difficult to reach a breakeven load factor which itself has moved up because of higher fuel cost.

Too crowded

It is also true that the herd mentality of Indian business has made many to join the fashionable high flying club without much planning. As everyone thought that by driving volume one can make money, they kept on adding new planes. Though all airlines are flying more flights with the low cost carriers (LCCs) configuration to cut costs, it did not help much as the fixed costs for fuel, interest payments, depreciation and maintenance and so on, constitute 90 per cent of the total cost.

More from Business Line: The rise and fall of a castle in the air.  Glamour.  Huh.

Why Are NPAs Rising?

When loans turn sour. And good luck with recovering sour loans.

Transparency On Bank NPAs

The Finance Minister seems to believe that disclosing the names of corporate borrowers who have defaulted on their loans is not desirable. His reasoning:

The disclosure of their names in a public forum (such as Parliament) will make the banking industry more sick, Mr Mukherjee told the Lok Sabha on Friday. He also highlighted the aspect of confidentiality clauses (in loan agreements) coming in the way of releasing the names of defaulters.

“If this (disclosing names) is done, a person will be declared insolvent even before the Court declares them (defaulters) as insolvent. And whatever possibility of recovering money from them will go. It will be depositors' money that will be lost (if we disclose)”, he said.

There must be some stage in the default process when the bank writes off a loan. Why not disclose the names along with the defaulted amount at that point? As for the confidentiality agreement - why is it there in the first place?

The gross NPA numbers are quite large: NPA write-off by new private banks up four-fold. Approximately Rs 75,000 crores, private and public banks taken together.