Swimming in a sea of sharks
It is perhaps only in India that Non-Performing Assets (NPAs) for government banks can reach an astronomical Rs 2,60,531 crores. So alarming is the situation that the Prime Minister’s office (PMO) is supposedly going to announce strict punitive action against a number of prominent real estate, diamond and media firms that are being probed by Central Bureau of Investigation (CBI). The Department of Financial Services (DFS) has also been keeping an eye on these high value defaulters for several years. The Governor of the Reserve Bank of India, Raghuram Rajan, has sent a detailed report to the PMO listing these willful defaulters, the reasons for delays in their investigations and the status of cases with the CBI. Governor Rajan while speaking at a seminar in Anand, Gujarat, last year, had stern words for companies who have willfully defaulted on loans to banks, saying that such borrowers should be seen as freeloaders rather than being celebrated as captains of industry.
The bank accounts cited by the RBI belong to Winsome Diamond and Jewellery, Zoom Developers, Tiwari Group, Surya Vinayak Industries, Deccan Chronicle Holdings, First Leasing Company of India, Biolor Industries, Surya Pharmaceuticals, Prime Impex / Prime Pulses, and a person identified as Shivraj Puri. The PMO has told the DFS secretary to examine these defaulters regularly and take it up with the cabinet secretary. It has also asked all concerned agencies to pursue the cases vigorously. The PMO has asked the DFS to suggest a mechanism for coordinating and pursuing high-value banking defaulters, including structural changes that may be required in bad-debt reporting, apart from suggesting regulatory changes where necessary.
One of the biggest defaulters as far as Indian banks are concerned is Vijay Mallya’s flying white elephant which he ironically named Kingfisher Airlines. Banks claim that he is a willful defaulter, a fact that Mallya contests vigorously. Even though he may not agree, he is a defaulter nonetheless and owes the banks a massive Rs 2,673 crores. In effect the average tax payer has paid for Kingfisher airline’s failings and not Vijay Mallya who should have been the primary person held responsible.
Until December 2011, Kingfisher Airlines had the second largest share in India’s domestic air travel market. The 14 banks, led by State Bank of India, which collectively lent Rs 6,500 crores to the airline, are now involved in litigation over the money, as Mallya has sued them in multiple courts. Mallya owes money to banks, employees, tax officials, caterers, aircraft leasing companies, fuel supplier Hindustan Petroleum Corporation and to random taxi operators, too. As Mallya continues to run away from paying debts that he owes all and sundry, his IPL and Formula 1 teams along with the annual swimsuit calendar his company releases seem to be doing all right.
The list of these defaulters ironically includes top ranked companies in their industries such as Sterling Biotech Limited, Surya Vinayak Industries, Corporate Ispat Alloys, Forever Precious Jewellery & Diamonds, Varun Industries Limited, Orchid Chemicals & Pharmaceutical, Kemrock Industries & Exports, Murli Industries & Exports Limited, STCL Limited, Surya Pharma, Zylog Systems (India) Limited, Pixion Media Pvt. Limited, Deccan Chronicle Holdings Limited, K.S. Oil Resources, Indian Technomac, Century Communication Limited and Moser Baer India Ltd. & Group Companies. All of them owe between Rs. 500 to 2700 crore to different banks. The list of Board of Directors in these companies is an eye opener.
Developing sound and healthy financial institutions, especially banks, is an essential condition for maintaining the stability of India’s financial system. The high level of NPAs in banks and financial institutions is a matter of grave concern and could have serious repercussions down the line. Therefore any steps the Narendra Modi-led government takes to tighten the ‘metaphorical’ noose around the neck of defaulters must be welcomed by the opposition.
I still vividly remember the immense difficulties Rajiv Gandhi faced in 1985, when he introduced the first ever system of asset classification for the Indian banking system. Until then the management of NPAs was left to banks and auditors. Rajiv Gandhi implemented the ‘Health Code System’ (HCS) which involved classification of bank advances into eight categories ranging from 1 (satisfactory) to 8 (bad and doubtful debt). It was again during the Congress government’s reign in 1991 that the classification of assets according to the HCS was synced with international standards. The Narasimhan committee, which led the efforts, suggested that for the purpose of provision, banks should classify their advances into four broad groups--standard assets; substandard assets; doubtful assets; and, loss assets. Following this, prudential norms relating to income recognition, asset classification and provisioning were introduced in 1992 in a phased manner.
Thanks to these efforts the gross NPAs, which were 11.8 percent of the total assets of the public sector banks two and a half decade are around 2 percent today. India, in that sense, is trying to match up with powerhouses like Australia and Singapore. India must manage its NPA situation with all the seriousness it can muster. Furthermore, there should be constant efforts at all levels to ensure that NPAs do not go out of control and willful defaulters are dealt without any leniency whatsoever. But let’s also remember that there are people who do the work and there are those who try to take the credit for it. If India is managing its NPA situation in a far better manner than other Asian countries, I have no hesitation in saying that it is because of the visionary initiatives taken by Rajiv Gandhi during his tenure as Prime Minister.
Author is Editor and CEO of News Views India