MOST public sector lenders and a few private banks are paying a heavy price for their reckless lending practices to the corporate sector.

The nationalised banks have been forced to make hefty provisions for bad loans and reported massive losses — both for the fourth quarter (January-March) of 2015-16 and for the entire fiscal.

Last week, state-owned lender Bank of India reported an unprecedented net loss of Rs60.89bn for the financial year ended March 31 (as against a net profit of Rs17.08bn in the previous fiscal). For the fourth-quarter of the fiscal, the bank reported a net loss of Rs35.87bn (as against a loss of Rs560m in the corresponding quarter of 2014-15).

The bank’s gross non-performing assets (NPAs) more than doubled to almost Rs500bn in Q4, while net NPAs also more than doubled to Rs280bn.

Bank of India’s net loss for 2015-16 — a record for any Indian bank — comes in the wake of similar losses reported by many other public sector lenders. Bank of Baroda, another leading nationalised bank, which also has a strong international presence, reported an annual loss of Rs53.96bn (as against a profit of Rs33.98bn in the previous fiscal). Its NPA went up by nearly 150pc to Rs405.21bn.

Punjab National Bank (PNB) reported a record net loss of Rs53.67bn for Q4 of the fiscal, and a net loss of Rs39.74bn for the entire financial year. The bank has suffered because of lending to companies in sectors such as steel. Usha Ananthasubramanian, managing director and chief executive, PNB says“We have heavy exposure to textiles and chemicals as well. We will be cautious on these sectors in the future.”

IDBI Bank, another state-owned lender, saw net loss soar to Rs36.64bn (as against a profit of Rs8.73bn in the previous fiscal).

Many other public sector banks have also reported massive losses in Q4 and during the fiscal. They include Syndicate Bank, Central Bank, Allahabad Bank and Dena Bank.

The total collective losses of 22 public sector banks in Q4 of the fiscal topped Rs200bn (as against a profit of Rs44.64bn in Q4 of 2014-15. The gross NPAs of public sector banks have surged by 150pc to Rs3.5tr.

Public sector banks have been virtually forced to identify and mark down their bad debts by the Reserve Bank of India (RBI), the country’s central bank.

Last October, Raghuram Rajan, the RBI governor, asked public sector banks to classify loans to the corporate sector — and which were not being repaid on time — as non-performing assets. Banks started reporting losses in Q3 of the fiscal, as they began making provisions for the bad loans.

IN December, the RBI had conducted an asset quality review (AQR) and had asked lenders to label visibly stressed assets as NPAs and make the necessary provisions. They were asked to finalise the provisions by the end of the fiscal.

The exercise had a disastrous impact on the balance-sheets of public sector banks. The provisioning resulted in the wiping out of profits of 12 of the 39 listed banks. For the December quarter (Q3), 24 public sector banks reported a total loss of Rs109.11bn.

The central bank has warned banks not to go slow on the identification of NPAs. “Banks should not now bring any slowdown in the clean-up exercise which they are doing,” said S.S. Mundra, deputy governor, RBI. “Even if the required classification and provision happens, I’d strongly urge that banks should continue to keep aside money, keep on improving their PCR (provision coverage ratio) till it reaches a strong percentage.”

Mundra also told banks to focus on strengthening their balance-sheet, instead of focusing on short-term profits and dividends. “If you keep on declaring profits, you pay taxes and give dividends. I think the better idea would be to strengthen the balance sheet rather than getting diverted by these short-term motives,” he added.

The RBI expects gross NPAs of banks could touch 6.9pc by March next year. The union finance ministry, which has had several run-ins with the RBI governor in recent months, also endorses Rajan’s comments.

According to the ministry, ‘if the macroeconomic conditions deteriorate, the GNPA ratio may increase further, and it could rise to around 6.9pc by March 2017 under a severe stress scenario’.

Many of the borrowers from sectors including steel, energy, roads and highways and infrastructure were trapped after the then United Progressive Alliance (UPA) government (before the National Democratic Alliance government came to power two years ago) sat over the clearances for months.

The Manmohan Singh government delayed approvals, resulting in billions of rupees of bank funds getting stuck in stalled projects. The lender’s woes deepened as many of the borrowers did not have access to funds to clear their loans.

The most notorious example was that of liquor baron Vijay Mallya, who allegedly defrauded several banks. Mallya owes about Rs90bn to Indian lenders, but has refused to clear the loans. In March, he left India and is now in the UK. While India sought his deportation, the UK government turned down the request. The Enforcement Directorate, which along with other agencies is conducting a series of probes against Mallya, has issued a non-bailable warrant against him, as it requires his personal presence at hearings.

But the billionaire-businessman — whose luxury homes, yachts and aircraft are going under the hammer — has refused to return to India and has vowed to fight a legal battle in British courts.

Published in Dawn, Business & Finance weekly, May 30th, 2016