Rising NPA: An organised crime
When the entire country is reeling under demonetisation woes, public attention has been diverted from the massive NPAs (Non-Performing Assets) that the banks have already incurred in the last few years. We need to know about the organisations, institutions, and systems responsible for such a financial debacle. ‘NPA’ is the asset recognised by the financial institutions as bad debt which can never be recovered and put back into the system in the near future. The rise in NPAs illustrates the government’s failure to initiate measures in restricting random increase of bad debt on a priority basis. If the intent of the government is to benefit the commoners how has the entire operating system failed to rise up to the financial challenge?
Looking back, we find ‘Nationalisation of Banks’ as one of the major steps taken towards bringing the masses to the banks. The aim was also to create various systematic methods of monetary channels for business so that the economy grows at a brisk pace. The lengthy period of rule of the Congress party and its allies followed by other political parties saw various schemes being floated in the banking system for the benefit of the general public. To keep the process going, the government infused funds at regular intervals to nationalised banks through the country’s biggest financial institution (RBI) in order to rescue the banks from possible destabilisation. We Indians have witnessed the Finance Ministry’s pro-active role as savior by pulling the banking system out of such critical situations time and again. Nationalisation of banks successfully attracted more people to be included in the purview of a systematic economic environment. But very soon the rogues in our society started to take advantage of the scheme and started capitalising on it. The public servants felt they were doing a ‘favour’ to the customers of the Banks, leading to deterioration in the standard of services. Globalisation and economic liberalisation added to the worry of the common customers as the big investors were seen to be coaxed more to avail loans from those Banks. The services meant for the poor became a privilege for the rich customers. Gradually the caged economy opened the gate and the tiger was out on a prowl. There was maximum impact on the poor and the middle-class. The ill-effect of capitalisation was felt to the core, exposing our monetary system to an imminent danger. Capitalisation brought the corrupt politicians, bureaucrats, public servants together to form a nexus among them and to vitiate the situation. They started amassing disproportionate wealth taking advantage of the system. Unscrupulous activities in banks appeared to grow many folds right under the supervision of the democratically elected people’s representatives. The dishonesty was blatant when it came to loans and credits, and all government-linked schemes. With the concept of open economy, the government allowed the foreign financial institutions and private organisations to resume their business in India.
But public sector banks continued to be guided by the government policies and in the process continued to make losses year after year. The situation became shoddier once their competitors in the private sectors started offering attractive schemes and were able to attract a significant part of customers to their system of financial channels. Like any other developing nation, India also needed fund flow to register economic growth. So, the primary focus was on lending, advances, and credits etc. as these were the most important channels to increase fund flow in the market. In simple terms, more and more people were being encouraged to avail different types of loans, (secured, unsecured etc.) so that they could seize the business and entrepreneurship opportunities.
In a sudden surge, from the late nineties, banking and non-banking houses scaled up their sales volume. Lucrative incentive schemes were launched, both for the staff and the customers. The entire financial atmosphere became fiercely competitive. The situation was such that people started avoiding entering banking premises due to the apprehension of getting hooked to another loan despite continuing paying two/three EMIs for two/three different types of loans. ‘Top-up’, ‘surrogacy’ became the punch lines of sales. Plastics overflowed the market. The average spending of a middle-class citizen jumped to an unbelievable high when they resorted to promiscuous way of spending and were in the fray for heightened lifestyles. They started to gobble up much more than their capacity to repay and went on a buying spree. It was celebration everywhere. Financial institutions, on the other hand, were flooded with ‘performers’ who enjoyed heavy incentives. So, even the ‘Bankers’ became rich over a small period of time. But little were they aware that the entire system was sitting on a bubble which was about to burst. As apprehended, ‘POP’ - burst the bubble in 2004/2005.
People struggled to repay what they spent in the last few years. There was a pall of gloom in the Banking sector as ‘Bad debt’ started to swell up. An interesting point to be noted here is that the private sector Banks and NBFCs, despite having stringent ‘Credit and compliance’ and ‘Bad debt recovery units’, suffered from the similar effect. But equally interesting was the nonchalant way in which the public sector banks continued to operate. Private sectors scaled down the sourcing of loans, even stopping the sourcing in most of the cases, as an immediate measure to combat the loss, with an eye on their balance sheets. Few foreign banks, in the race to compete with their Indian counterparts, not only burnt their fingers but lost a fair share of their capital in the process. Such was the magnitude of the loss that few were even thinking of winding up their business from the entire Asia pacific region. Fraudulent activities by insiders and outsiders marred their prospect of recovering the loss registered in their account books. Though they took pride in having a robust system in place to deflect those unwanted threats in business, a sudden drop in profits forced them to take some drastic steps for just survival. They revamped their recovery and legal section on a war footing and increased overheads in those departments to cope up with the situation. ‘Sales’ and ‘Collection’ teams worked in tandem to recover loss. They were at war against increasing loss in terms of bad debt which contributed to the NPA. The delinquent portfolio was immediately entrusted to debt recovery agencies to recover on a faster note using outsourced manpower.
A major share of defaulters fell in a debt trap with multiple loans under one head. But the number of intentional defaulters and fraudsters soared to an abnormal high. They took advantage of the catastrophe and tried all crooked means to enable them to get away without repaying their loans. This section of customers created havoc in both private and public sectors of banks. Filing ‘Insolvency’ increased rapidly. Later, Courts declared those cases of insolvency, filed during a particular period illegal. Hence, 2007, 2008, and 2009 were the years of mending and putting the derailed rake back in track for the private counterparts as they revisited their credit policies, scrutinised the KYC campaigns over and again and reinstated all the possible legal backups to ensure quick repossession of their assets. Besides this, the most important step they took was to identify the negative areas from where they sourced loans and further barring them to prevent additional damages. In the process, they came to know about the rogues in our society who actually inflicted such loss. They conducted their internal investigations and back-tracked the strings attached to them and thus got hold of the guilty insiders too. Many heads turned within the organisations on issues of integrity, non-compliance of audit recommendation, unfair banking practices etc. Some exemplary actions, including legal recourses were taken against errant employees to send strong warnings to the rest of employees serving the organisations. The other major reason for the lay-off was to put a control over costs involved in running the business due to excess overhead.
In contrast, the management of the public sector banks did not initiate such concrete steps. Though country’s custodian of the banks laid down a set of rules to be followed universally by all sectors of Banks, flouting of such rules were overlooked in case of public sector banks which continued to ignore the situation even as the unified business volume of the private sector banks put together was a zilch in comparison to theirs. As a result, the situation went out of control for them. The defaulters in these banks increased in geometric progression too. Small, medium, and big enterprises were among the list of defaulters as well. Though there were departments like ‘compliance, fraud controls, recovery’ the state of affairs was found to be in shambles. Factors such as corruption, poor work culture, and lack of co-ordination in the departments, led to a failure in dealing with the crisis. Big borrowers were large in numbers with some of them involving many from the top brass of the society. Hence, the banks dare not call them for repayment. The institutional, consortium, and industrial loans suffered the most. Thus, while the private players in the market for 8-10 years had already consolidated their loss and were planning to restart their business afresh, the giant nationalised banks somehow just managed to declare their colossal NPAs. The latter did so only when they came under the pressure of the former RBI Governor, Dr Raghuram Rajan. Dr Rajan seems to have had to make his way out for bringing this unpleasant truth in front of the public.
Easy solutions such as fund infusion and portfolio selling were chalked out. The most important factor of ‘accountability’ was clearly missing. The range of government employees, from regulatory bodies to the lowest rank appeared to have attained full immunity from this episode of rising NPAs. The so-called ‘public servants’ who were behind the maximum number of bandhs, called in a year bore no responsibility of such financial despondency. While the private sector banks could assign thousands of delinquent cases on the click of a mouse the public sector, Banks managed to allocate not more than 2-3 cases per day due to the lack of availability of relevant documents. There were also instances of multiple funding on a single asset by more than one public sector banks. These are unpardonable offences in the eyes of law but nobody is questioned and the issues remain unaddressed. How can a law enacted for one particular purpose in a country, have different applications or connotations in the same operating system? On what grounds do some banks enjoy such immunity in the prevailing system?
In the case of commercial loans, consortium loans etc., the exposures to risk are excessively high because the lenders involved here are a cluster of public sector banks or even some private sector banks and potentially large business houses. The amount of lending is so large that it requires final approval of RBI, the highest policymaker in Banking business and/or the Ministry of Finance, and sometimes even SEBI (Securities and Exchange Board of India) to ensure guarantee of return of funds. If these transactions get approval from all these quarters of custodians after due diligence, how does this fund become irrecoverable after a few years? How can Vijay Mallya enjoy free passage to another nation dodging all the departments and ministries? These glaring loopholes are never addressed for some obvious vested interests. The nexus among the custodians and their clandestine activities is no big secret for common people to understand which is for sure causing mayhem in the current socio-economic scenario of India.
The mobilisation of funds from the tax-payers money to heal the abrasion is a temporary solution. This step, termed as the flowing of ‘good money’ over ‘bad money’, has been taken by the Finance Ministry on earlier occasions as well. The next solution adopted is selling off the bad portfolio to debt buying institutions at a discounted rate without taking action against those who have worked within the system to vitiate the arrangements and are roaming scot free. Though a considerably large sum is spent upgrading the banking systems to get optimum result, it is never used for the best interest of the common people who are in dire distress. The staff strength of banks is a real issue but no action is taken to bring it to a logical end. Unionised staff enjoying absolute immunity has become the unwritten rule. Any investigation initiated to unearth any fraudulent activity ultimately takes such a long time that people tend to forget the incidents. When the highest regulatory authorities entrusted with enforcement and implementation of statutory activities remain silent, how can the common people keep faith in them? They are no less guilty than the biggest perpetrators of the financial system whose misdemeanors have affected the entire country. The increasing NPAs establish their liaisons with an organised crime which may cause mayhem in times to come and cripple one of the largest democracies of the world.
(The author is a former banker. Views expressed are strictly personal.)