Go after defaulters

Earlier this year, Union Finance Minister Arun Jaitley said that the “green shoots of (economic) recovery” have begun to emerge. One look at the state of Indian banks and such claims seem laughable.  Hit hard by mounting non-performing assets (NPAs), many leading public sector banks last week reported their highest ever quarterly losses aggregating to over 12,000 crores. The Bank of Baroda reported a stunning loss of Rs 3,342 crore, the highest ever quarterly loss posted by any public sector bank in the industry. Data collated on 39 listed banks showed that NPAs surged to Rs 4.38 trillion for the quarter ended December 31, from Rs 3.4 trillion at the end of September. These revelations come amidst Reserve Bank of India Governor Raghuram Rajan’s call to banks to accelerate the recognition of stressed assets. The RBI has set banks a March 2017 deadline for banks to clean up their balance sheets. However, instead of throwing the book at defaulters, the RBI Governor has asked banks to make provisions for these bad loans by the end of this March. Data also shows that provisions against bad loans have spiked by 90 percent in the recent quarter. In banking parlance, provisions against bad debts refer to an amount that a bank shows on its accounts to represent the money that is owed to it. In most cases, the amount owed is unlikely to be paid back. It is no secret that diversion of funds by corporates to unrelated activities through fraudulent means is one of the primary reasons for the rising non-performing assets (NPAs) in the banking and financial services industry. “Around 87 percent of the respondents stated that diversion of funds to unrelated business through fraudulent means is one of the root causes of the non-performing assets crisis,” according to a recent study. Borrowers are evidently abusing restructuring norms set by regulatory authorities, the study went on to add. 

Suffice to say, crony capitalism has been probably the biggest contributor to the current credit crisis in our banking industry. Although the RBI and the NDA government have reportedly been on top of this crisis for some time, little has been done until now. The government must go after errant defaulters while kick-starting the lending process by instituting some structural changes to our public sector banks. According to a recent column in Mint, “Indradhanush, the NDA plan to revamp PSU banks launched recently provides the blueprint (to revamp India’s public sector banks). The core of this strategy is to delink governance of banks from political influence emanating from Delhi by strengthening the bank management. Once in place, the management will have the confidence, especially with the authorities cracking down on wilful defaulters, to tell off influence peddlers.” But more than strengthening the management of banks, the government must go after the major corporate defaulters involved in the crisis. By using their political connections and working the overburdened judicial system, these large corporate entities continue to default on their loans, without paying the price for it. However, one must remember that the infamous Vijay Mallya of Kingfisher fame is only one example. The list of major defaulters includes Reliance ADA, Vedanta, Essar, Adan, and the Jaypee Group, among others. These banks are now stuck with large amounts of bad debts or Non-Performing Assets (NPAs).

With swelling NPAs, banks are forced to push up the risk premium, which in other words amounts to raising the cost of lending. “That’s exactly why there is such a huge gap in the commercial lending rate and the policy rate of the RBI. This, in short, is the price of crony capitalism. It is not just banks that are impacted. The resulting high-interest rate regime precludes investments, erodes the competitive ability of Indian business and leaves a big hole in our wallets through payouts on EMIs,” according to a leading Indian business daily. There are wrongdoers among the Indian business community who have raised the cost of borrowing for the common man. Suffice to say, the knock-on effect of these bad debts has been deleterious for the entire economy. Experts have argued that the bankruptcy code, which has been introduced in Parliament, will ensure that the political class will have the requisite legislative tool to tackle these wasteful behemoths. The code, if passed into law, can ensure quicker resolution of the bad loan problems dogging PSU banks, through a formal insolvency process of the defaulting business. However, the problem is not one of law, but of political will.