In June 2018, at a research presentation at NDMC Convention Centre, New Delhi in the National Level of an ICAI (Institute of Chartered Accountants of India) Competition, I presented in the attendance of many Foreign Accounting bodies’ dignitaries. Here, I dedicated substantial time of my presentation to explain how essential the NPA (Non-Performing Assets) crisis of 2017 was, fundamentally for the Indian Banks. It got instigated by RBI’s diktat on stringent AQRs (Asset Quality Review) with Mr. Raghuram Rajan in office as the chief. This was at a time when topics like gargantuan bailouts by Central Government, tumbling bank stocks resulting in erosion of investor’s wealth, the collapse of the Indian economy from its highest highs were going hot in streamline media and economic forums. The proponent media and the leading economists in the country were blazing guns at the ex-RBI Chief for the mess, which led to the economic slowdown and eventually, the collapse of Yes Bank under today’s scenarios.
Similarly, my claims were contested by the ICAI’s jury when I questioned many people, including the auditors in the case of- Nirav Modi lead Firestar Group and Punjab National bank (PNB) scandal at its Brady House branch in Mumbai. Maybe, the auditors were not responsible for hiding long-running NPAs, and it was sponsored solely by the branch managers inspired by the bank’s long-standing philosophy to keep the financials clean at all costs.
As a fundamentalist and believer of the Geeta, I know the truth is only one and it cannot be disillusioned by the different perceptions of conceiving it. Keeping aside the promoters in the PNB scam, somebody was responsible for it. Any technicalities of law with regards to accountability should not be used to palliate the trust of all the stakeholders involved. Knowing and accepting the setbacks is the first step towards realization, leading to improvement. I debated with the jury that Mr.Rajan’s every measure was to position NBFCs, Private, and PSBs banks towards a secure financial footing. It was to build trust in the financial statements and increase banks’ resilience in case of an unforeseen crisis.
Precisely two years down the line, the COVID pandemic, a non-adjusting and unprecedented event, not just as per the books of Financial Reporting but also for the unforeseeable damages that it afflicted in people’s personal lives. Today, Bank Nifty has lost more than 35% value and leading PSU banks lost 50% in market capitalizations since February as the pandemic dented the asset quality outlook especially, because of the risk associated with personal loans as people continue to get laid off, pay getting reduced and social security contributions compromised.
Nifty PSU Bank index has underperformed in the market by falling 20 percent compared to a 3.7 percent decline in the Nifty 50 index. Even though stocks are underperforming, they still seem to indicate better resilience, all credited to better-positioned financials which reveals an accurate and fair view to a certain extent. Today, right from the RBI boardroom to the Madras High Court, discussions are going on about how grossly unjust NPA recognition standards are. As per the views of the petitioner challenging it in the Madras High court, “It is a technical fallacy with no national or international basis and therefore, is grossly misrepresented and exaggerated at the behest of the international financial sector.” His contention seems correct as the “one-size-fits-all 90-day NPA rule” just does not fit all industries; which are so different in characteristics from each other. The ramification of this classification is businesses becoming NPA and subject to the Insolvency and Bankruptcy Code (IBC). According to the Government data, USD 150.21 Billion at the end of March are in NPAs and trillions going under Moratorium due to the damage afflicted by the COVID-19.
After giving you the stock of the current situation, I want to ask certain questions from the likes of all those economists who questioned Mr.Rajan for inflicting AQR havoc on the Indian banks and, ultimately the Indian economic slowdown.
Those economists should come forward and answer today that if the Asset Quality Reviews were not done during the booming stage of the economy and the recapitalization that was done afterward, what would have been the fate of the Indian economy during COVID. Appropriations made during those times made the banks resilient and their balance sheets clean, ultimately preparing them for such a crisis. The situation today would have been so worse than it would have led to the collapse of some of the major Indian Public Sector banks, notably Punjab National Bank, and ultimately would cripple the already strained Indian economy under the COVID shock.
Two former RBI Governors whose terms ended at a belligerent note was trying to find hidden stress in the bank books. It was a righteous move that saved the Indian economy today. The credit also goes to Former Finance Minister Late Shri. Arun Jaitley, under whose leadership right appropriations for the recapitalization of banks were done at the right time. The likes of the economist who questioned both the RBI Governors should answer the What-If scenario. They should justify their belligerent statements given for the former Hon’ble Governor of RBI, whose policies when tested on the scale of time came out as true as they were perceived.
-Khushal Gulati