Dud loans or daylight bank robbery?
| by Virendra Parekh | on 10 Dec 2013 |
Money in public sector banks, it seems, is up for grab by crooked businessmen, corrupt officers and their wily political masters. What is happening in the public sector banks is nothing short of daylight bank robbery in which hard-earned savings of small depositors are systematically siphoned off to fatten parasites with power and influence.
The irony is hard to miss. If a person borrows a small sum and is unable to repay the debt, the banks blacklist him. He will not be eligible for receiving any future credit. But if he happens to be a big industrialist and has borrowed a large amount (the bigger the better), the chances are that not only his loan will be written off, but he will also be able to borrow large sums again, often from the same bank. This has been highlighted by none other than the Reserve Bank of India itself.
Cold statistics of bad loans that may have to be written off partly or fully - euphemistically called non-performing assets (NPAs), troubled loans, restructured loans or distressed assets - often hide ugly realities of high level corruption, political interference and sheer incompetence. Mostly, it is the numbers that get dissected in the context of the macro-economic scene and the human side is quietly neglected as insignificant.
The year 2012-13 saw a dramatic increase in the non-performing assets of the Indian banks. Within Indian banks, public sector banks saw a greater deterioration of the asset quality (i.e. more loans turning bad) than their private sector rivals.
As per the RBI’s report on Trend and Progress of Banking in India for 2012-13, gross NPAs of public sector banks rose from Rs. 1178 billion to Rs. 1650 billion (i.e. 40 per cent) and those of the private sector banks from Rs. 187 billion to Rs. 210 billion (12.3 per cent). The net NPAs of public sector banks rose from Rs. 593 billion to Rs. 900 billion (i.e. 52 per cent) and those of the private sector banks from Rs. 44 billion to Rs. 59 billion (3 per cent per cent).
The NPA figures do not tell the whole story; they do not include the loans written off. In 2012-13 itself, loans of Rs. 12,000 crore were written off by banks, half of these by SBI group alone. RBI Deputy Governor KC Chakrabarty said recently that write offs in some years accounted for nearly 50 per cent of reduction in NPAs, as compared to actual recoveries and upgradations.
While NPAs are by definition loans under stress, there is another, equally worrying indicator of the corporate sector’s inability (or unwillingness) to service bank loans: the rush for revised, easier terms of repayment or what is euphemistically known as corporate debt restructuring (CDR). This is nothing but another name for a partial waiver of bank dues and the remainder to be paid at leisure - if at all.
2012-13 seems to have been a highly stressful year for the industry and banks. Data available with CDR cell of bankers show that during the year 2012-13, 130 cases had been referred for corporate debt restructuring, involving a total credit of Rs. 91,648 crore. During the year, 109 applications involving a total credit of Rs. 78,498 crore were approved. These numbers are much higher than the previous fiscal year.
The proportion of restructured standard assets to gross advances increased from 4.7 per cent in March 2012 to 5.7 per cent in March 2013. For public sector banks, it increased from 5.7 per cent to 7.1 per cent. Taking gross NPAs and restructured loans together, the proportion of impaired assets increased from 7.6 per cent in March 2012 to 9 per cent in March 2013 for all banks and from 8.9 per cent to 10.9 per cent for public sector banks.
We are told that the problems related to corporate indebtedness are taking their toll on the asset quality of banks. Buffeted by tepid demand, falling currency and high interest rates, companies and businesses are finding it increasingly difficult to service their debt. That is why banks have seen a steady rise in their problematic loans.
However, this is only a part of the explanation. Private sector banks both new and old also operate in the same macro economic conditions. Still they are able to contain their bad loans because they are vigilant in credit appraisal, risk management and loan recovery. They lend less to wily businessmen who know all the tricks in the book to dodge a loan and more to middle class people who are far more honest and regular in repaying their debt. Even when they lend to corporate houses, it is more to meet short term working capital needs than long term projects that may take years to complete and are dogged by uncertainties of several kinds.
Public sector banks seem to be fair game for businessmen with strong political connections. They manage to get large loans for dubious projects, happily default and carry on with business-as-usual. They have strong industry associations and lobbies to plead their case. Chairmen and directors of public sector banks who depend upon politicians in power to get and retain their jobs dare not displease them. Bank unions have disclosed that the combined default by 50 corporates totalled Rs. 40,528 crore of bank loans, about 25 per cent of total NPAs of public sector banks at Rs. 164,461 crore.
An industrialist who has borrowed, say, Rs. 100 crore (a small amount by standards of the banking system), can easily spend Rs. 10-20 crore on getting the loan written off. How much time, attention and money can an educated and conscientious middle class householder devote to prevent the write off, assuming that he comes to know of it? And what are the means at his disposal? A letter to the editor, bank chairman (who may be party to the write off), or the minister is all he can resort to.
Unscrupulous bank officers have learnt to swim with the flow. Small borrowers routinely tell you of the cut they have to pay the bank staff to get the loan. Officers in higher positions serve bigger businessmen for larger stakes. Sample this. The CBI raid at the Mumbai residence of State bank of India’s Deputy MD Shyamal Acharya led to seizure of gold and jewellery worth Rs. 67 lakh, locker key, documents pertaining to investments in fixed deposits and other incriminating documents in a graft case related to disbursal of a loan of over Rs 400 crore to Worlds Window Group owned by one Piyoosh Goyal. Shyamal Acharya is in charge of the mid-corporate segment and has handled many prominent accounts, including Kingfisher Airlines. If a scandal does get exposed, it takes years to establish the fraud and fix the responsibility. In the end, small fries are sacrificed as scapegoats while the big fish manage to go scot free.
It is tempting but futile to blame economic reforms for this daylight robbery. If we had proper capitalism, banks would sell off promoters’ shareholding in the company, their other assets or securities offered against the loan and recover the dues, rather than throwing more good money after bad. Bank managers who gave loans in excess of the value of securities would be held accountable. But this cannot happen under our crony capitalism.
The RBI has asked banks to be more vigilant in appraising loan applications, examine the background of the applicant, monitor use of funds and be prompt and alert in recovery. In theory, this is sound advice. In practice, can it protect an upright bank chairman or director hounded out for refusal to bend to the wishes of the politicians and bureaucrats?
Government ownership of banks, which in practice means control of politicians in power, is the crux of the problem. It is the biggest barrier to real reform in the banking system. In fact, private sectors banks look super efficient primarily because public sector banks are so poorly run. The latter are racking up huge amounts of bad loans based on politically mandated lending to favoured sectors or crony capitalists. Public sector banks need high spreads between lending and borrowing rates to hide bad loans, and the private sector is happy to use this same spread to make super profits. No real reform of the banking system is possible until the basic question of ownership is addressed.