Why be blind to huge firm debts
19 Nov 2013 3:44 AM IST
The jaw-dropping revelation by the Reserve Bank of India (RBI) that ill-advised corporate debt restructuring (CDR) has allowed for a staggering Rs 1 lakh crore worth of bad loans written off by the banks has proved one point. Casting a blind eye to corporate corruption and bank defaulters from the business sector is becoming a norm in this country, with state-run and foreign banks hit by bad loans since their non-performing assets (NPAs) have been seeing an incremental rise. As per data shared by the RBI, NPAs of public sector banks rose to Rs 1,11,664 crore in 2012 from Rs 52,807 crore in 2003 – more than doubling in their numbers. This is, as it’s being reported, much higher than the much-lampooned farm loan waiver issued by the finance minister P Chidambaram in 2008, around Rs 60,000 crore, which had caused a huge uproar in the corporate sector and neoliberal sections of the media and public sphere. However, what the banks have been steadily doing in the last decade is accumulating bad loans, of which more than 95 per cent have been exposed as large loans to major private players. Of course, as the diagnosis stands, the increasingly weakening banking sector can be attributable to the growth slump faced by the corporate sector, which is unable to pay back its rising debts in time. But under no circumstances can that enormous amount, basically loans taken by large and medium enterprises having over 50 per cent share in the banking NPAs, be waived off on account of potential non-recoverability. Moreover, that does not do away with the fact that what is at the root of this poison tree is inadequate credit appraisal coupled with shaky economic conditions of the past few years.
The fall is asset quality has been driven by CDRs, with potential defaulters given more time to repay without being called defaulters, thereby almost quashing credit quality in banks. Moreover, technical write-offs that the banks indulge in present skewed figures, since the figures indicating the protracted process of little or no recovery are promptly taken off the book, in order to reduce NPAs. In additionr, since after a technical write-off, there is no incentive to pursue recovery, huge amount of money goes down the drain. This not only lets the malaise fester without being adequately addressed, it also creates a large deficit of actual money available to banks for lending out to smaller firms who are in real need of the loan. Undue and bad credit to the top large corporate groups means less money for others, as well as increasing burden of NPA. This unnatural tilt in favour of private sector companies that are the biggest culprits in the financial defaulter circuit shows the present mess that the banking sector finds itself in is basically created by its own misguided policies. Banks must raise their guard against bad loans to shore up the provision coverage ratio, which has dropped to an abysmal 50 per cent at present. What is needed urgently is stricter regulation and new rules to ensure better credit checking, early detection of NPAs and disallowing the rather counterproductive scheme of credit restructuring with retrospective effect.
The fall is asset quality has been driven by CDRs, with potential defaulters given more time to repay without being called defaulters, thereby almost quashing credit quality in banks. Moreover, technical write-offs that the banks indulge in present skewed figures, since the figures indicating the protracted process of little or no recovery are promptly taken off the book, in order to reduce NPAs. In additionr, since after a technical write-off, there is no incentive to pursue recovery, huge amount of money goes down the drain. This not only lets the malaise fester without being adequately addressed, it also creates a large deficit of actual money available to banks for lending out to smaller firms who are in real need of the loan. Undue and bad credit to the top large corporate groups means less money for others, as well as increasing burden of NPA. This unnatural tilt in favour of private sector companies that are the biggest culprits in the financial defaulter circuit shows the present mess that the banking sector finds itself in is basically created by its own misguided policies. Banks must raise their guard against bad loans to shore up the provision coverage ratio, which has dropped to an abysmal 50 per cent at present. What is needed urgently is stricter regulation and new rules to ensure better credit checking, early detection of NPAs and disallowing the rather counterproductive scheme of credit restructuring with retrospective effect.
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