Banking

A huge cover-up?

In this age of Whatsapp and Twitter, many of us may have read a story wherein a gang of dacoits loot a bank and one of the younger members of the gang wants to count the booty there and then in the bank itself. But he is wisely advised by an elderly dacoit that they need not count it there as it will only increase the risk of being caught, and also they do not need to count it at all as the entire media will blaze the amount robbed in no time and they can simply stay cool and watch various TV channels headline the story. But the elderly robber is in for a rude shock when he watches TV channels quoting the amount at `10 crore wherein repeated counts of the booty confirm it to be only `2 crore. He soon realised that the remaining `8 crore had been tricked away by a smart coterie of bankers themselves; the crony capitalists, the law-enforcing agencies, accommodative media and politicians patronising all of them. The recent NPA crisis of public sector banks is in fact such a story playing out in the Indian banking system and it is set to worsen and pose a real threat to the financial stability of the country, thereby endangering even national security.

This, primarily, was the reason a bench of the Supreme Court, headed by Chief justice TS Thakur himself, took suo motu cognisance of the matter, based on a story in a leading daily on a massive write-off of bad loans by public sector banks and ordered the Reserve Bank of India (RBI) to share with it the names of all defaulters who owe over `500 crore and continue to lead a “lavish lifestyle”. More than the RBI Governor, Raghuram Rajan, Prime Minister Narendra Modi should be worried about the mounting bad loans in the Indian banking system, a majority of which is in the books of state-run banks. This is because it can potentially derail the fiscal arithmetic of his government, which is walking a tightrope in fulfilling its commitment of fiscal consolidation. Indian banks require around `3 lakh crore to meet the Basel-III norms (a target that otherwise is extremely difficult to achieve due to multiple factors), while the government has so far committed only `70,000 crore. However, with the recognition of and provisioning for NPAs that may well be more than `7 lakh crore, the amount that the government will need to meet Basel-III norms is any body’s guess and will be an unachievable target in the near future. The dwindling investors’ interest for these banks in the market has further made the task almost impossible to achieve. Also, the NPAs, as a percentage of net worth, are well over 50 per cent for the majority of the state-owned banks. If some of the sectors, such as steel and power, where impairment of large parts of loans is yet to be assessed whereas loan growth continues to be high, and those of some big corporate groups are taken into account, the NPAs may be much more than what most estimates now gauge. This will further increase the recapitalisation amount needed for the public sector banks.

The matter that needs to be probed thoroughly is how public sector banks and financial institutions have been advancing such huge loans without proper guidelines or an adequate loan recovery mechanism, thereby putting a huge burden on the public exchequer. Corporate credit accounts for a majority of the bad loans, as compared to housing loans that have the lowest NPAs at less than 1 per cent. The corresponding figure for retail loans is less than 3 per cent while it is estimated at 8 per cent in case of farm credit. The highest delinquency is in the corporate loans category at 8-12 per cent. In the case of individuals, banks, through the Credit Information Bureau (India) Limited (CIBIL), are able to check the total amount of loans that a person has borrowed, what is his EMI, his credit history and so on. It is not only surprising but shocking as well that there is no similar database which covers companies’ loan portfolios and track records despite the fact that the amount of corporate loans is very high as compared to individual loans. It is due to the higher losses in such loans that interest rates on retail loans (that have lowest NPAs) and other loans are kept high. Finally, Finance Minister Arun Jaitley announced in his Budget speech that such a database will be collated. Unless the basic underlying causes that have resulted in the present crisis in the public sector banks are addressed, the taxpayers’ money will continue to be squandered like this. These include the issues of governance, ownership and political interference and allowing the public sector banks to function at arm’s-length distance, as prudent and viable commercial entities. Even the opaque functioning of the Corporate Debt Restructuring (CDR) Cell, that has supported dubious firms, needs to be probed thoroughly, says Dr GS Sood. MG Devasahayam and Alam Srinivas analyse.

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