For better accountability
The Reserve Bank of India on Wednesday submitted a list of defaulters owing Rs 500 crore or more to public sector banks as per the directions from the Supreme Court. The list was submitted after the apex court had earlier ruled the central bank is “clearly not in a fiduciary relationship with any bank” and it cannot hide information that may cause any embarrassment. However, in its submission to the court, the central banks said it was “extremely necessary” to keep these names confidential due to their “fiduciary relationship”. “Disclosing personal information which is fiduciary in nature with regard to banks by a statutory body (RBI) would defeat the very purpose of having fiduciary responsibility on the part of banks,” the RBI said. “For these reasons, it is extremely necessary to keep the confidentiality of the information provided along with this affidavit.” But it is imperative to note what the central bank said in this regard: “RBI is supposed to uphold public interest and not the interest of individual banks. RBI is clearly not in any fiduciary relationship with any bank. RBI has no legal duty to maximise the benefit of any public sector or private sector bank, and thus, there is no relationship of “trust’” between them. RBI has a statutory duty to uphold the interest of the public at large, the depositors, the country’s economy, and the banking sector. Thus, the RBI ought to act with transparency and not hide information that might embarrass individual banks.” In its response, the central bank has accepted the argument that sharing the details of defaulter with other banks could help them address the irresponsible behavior of large corporate borrowers. But by declaring such names in the public domain, the RBI contended that it could discourage investment by viable and well-intentioned promoters and legitimate risk-taking.
“Disclosing details of accounts where defaults have been found irrespective of the reasons, therefore, may have an adverse impact on business and in a way may accentuate the failure of business rather than nursing it back to health,” argued the RBI. As this column has stated time and again, the reasons for default could boil down to factors beyond the control of borrowers. But it’s a question of accountability or the lack of it shown by large corporate borrowers that have compromised India’s financial system. In response to a recent Right to Information query, the government revealed that the sum of bad loans in public sector banks had increased three times from 2012 to 2015. By the end of March 2015, the total amount of bad loans stood at Rs 52,542 crore. Moreover, according to a recent, a report by the Indian Express, bad loans amounting to Rs 1,14,182 crore was waived between 2013 and 2015. By using their political connections and working the overburdened judicial system, these massive corporate entities continue to default on their loans, without paying the price for it. Deposing before the Parliamentary committee, RBI Governor Rajan said that the banks had failed to fully predict the profitability and viability of infrastructure projects before providing them loans. “There was inadequate project evaluation of assessment of promoter or management capacity or even financial capacity,” he said about projects which got shelved or stopped generating funds and hence their promoters defaulted. “We did not do a good job. Therefore, some of these projects have got into trouble.” In other words, these banks did bother to conduct due diligence under pressure from their political masters. Although the RBI and the NDA government have reportedly been on top of this crisis for some time, little has been done until now. In the recent past, the government has gone after the likes of Vijay Mallya while kick-starting the lending process by instituting some structural changes.
Meanwhile, in an interesting development, Kingfisher Airlines Chairman Vijay Mallya has offered to pay banks Rs. 4,000 crore as a partial settlement of the carrier’s debts. The defunct airline founded Mallya owes more than Rs. 9,000 crore to the lenders. The stated logic behind some in the media is that Mallya’s loans form only 3.5 percent of the total defaults, and, therefore, he is nothing but small fry. But the moment banks settle with Mallya, they will have to start settling with all other defaulters as well. The "moral hazard" that will be built in into the financial system because of any such settlement will be massive. Other than allowing industrialists to settle, the message sent will be that it's okay to take on loans, default and then settle later. Mallya must either pay up the entire amount or face prosecution for any alleged wrongdoing.