Banking reforms may not stop loot

A former Citigroup trader, Tom Hayes, recently found guilty by a London court of rigging London interbank offer rate (Libor), was sentenced to 14 years in prison for conspiracy to defraud. Earlier, many top executives of multinational banks have lost their jobs, following the revelation of the Libor manipulation scandal. Libor is used as a benchmark for trillions of dollars worth of bank loan transactions. India’s corporate sector is among the major borrowers under <g data-gr-id="60">Libor</g> and has been bearing the burden of its manipulation for years. Unfortunately, there is no exemplary punishment in India for financial fraud and manipulation, including understatement of junk loans and large bank defaults by big borrowers in connivance with bank officials.

The NDA government is in the process of overhauling the management and structures of public sector banks. The intention is good. Nothing much has changed in PSU banks’ management style since they were nationalized over four decades ago. However, the key questions of fixing responsibility of messing up with public deposits and trusts and awarding strong punishments to those helping bank frauds, including certifying faulty balance sheets as good for giving more credits, remain hazy. Hiring private sector executives may not help. Most large foreign banks flopped and sold in recent years under the massive burden of fraud were all so-called professionally managed private banks. Japan’s Dai-Ichi Kangyo, once the world’s largest bank, was just one of them.

At the end of 2014, India’s 30 top bank defaulters were sitting on bad loans of over Rs. 95,000 crores or one-third of the entire declared non-performing assets of public sector banks. Big financial crimes by large and medium business houses, by way of their financial engineering, asset overvaluation, and ‘bank loot’, should have put several of them and bank officials in jail for long years. In the 1980s, Dunlop India and Shaw Wallace and their bankers were among the biggest offenders in this regard. More recently, Ispat India and Kingfisher Air robbed PSU banks of over Rs. 5,000 crores each. Taxpayers or the public are indirectly made to pay for them by way of the government’s ‘recapitalisation’ of PSU banks. Also, permission is given to them to raise more equity capital from the public. Banks are rarely pulled up for massive annual loan write-offs. No one is held responsible. No one is punished.

PSU banks wrote off loans worth Rs. 1,06,170 crores in just last five years, according to the Reserve Bank of India. The gross non-performing assets (NPAs) of PSU banks at the end of last year stood at Rs. 2,60,531 crores. And, those 30 defaulters accounted for 36.5 percent of these ‘badly sticky’ or irrecoverable assets. Bank defaulters even enjoy a kind of social protection from the government, which rarely discloses the names of defaulting companies and their owners. The employees’ unions, such as AIBEA, sometimes do. RBI Governor Raghuram Rajan has expressed concern over the reliability of NPAs disclosed by banks. The actual figure of sticky bank assets could be much larger than what is officially reported. This is a real cause of worry.

India’s large commercial banks are mostly owned and controlled by the government. A borrower’s political profile often plays an important role in influencing lending decisions. A former prime minister’s entrepreneur son was reportedly involved in the 1993 bank scam. Another top politician’s businessman son-in-law has been in the news for his involvement with one of India’s top real estate tycoons, running a massive debt with nationalized banks and contingent liabilities. The law’s so-called long hands rarely reach them.

Meanwhile, PSU banks’ unpaid loans are ballooning. Their large bad loans, already high, rose 20 percent over April-December period in 2014. Together, these banks account for 72 per cent lending in India. Their gross NPAs may have actually topped the Rs.2.75 lakh crore mark. The picture could have been much worse but for corporate debt restructuring by which borrowers reschedule loan repayments and tinker with interest rates. The gross NPAs plus restructured loans by the end of 2014 would amount to Rs.5.45 lakh crore (almost $88 billion). Infrastructure (including power, telecom, airports, roads, ports & rail), iron & steel, textiles, mining and aviation contributed significantly to the level of stressed advances.

Out of 26 PSU banks (including SBI), 19 reported gross NPAs of five percent or more in the last quarter of 2014-15. By 2018-19, the government wishes to infuse Rs.70,000 crores into PSU banks, including Rs.25,000 crore each during this year and next year. Even Moody’s think the amount is small to realistically cover the capital adequacy ratio of these banks. Unfortunately, the issue of systematic bank fraud by industry in India continues to get glossed over.