Economic Highlights

New Delhi, 22 November 2013

Of Loans & Waivers

DEPOSITORS LOSE, CORPORATE GAIN

By Shivaji Sarkar

Indian banks are playing merry havoc with the system. If one is a small borrower and unable to repay the debt, the banks blacklist him – i.e. he would not be eligible for receiving any credit in future. But if one is among the ten biggest Indian corporates, it has the luxury of the loans getting waived almost to the tune of Rs 2 lakh crore and continues to receive more loans and possibly may get more waivers.

This shocking revelation has come from the banking regulator, the Reserve Bank of India. The waiver was pocketed by the ten biggest corporate groups. However, no assessment has been made to the extent the small depositors and senior citizens have lost in terms of interest and higher bank charges. A wild guess would be that it would be more than double the amount gained by the corporate.

In fact, RBI Deputy Governor KC Chakarabarty says it is almost a regular practice of the banks to window dress their rising non-performing assets (NPA). The RBI has observed that higher the loan amount greater the banks are at risk. Since 2007, credit to ten large corporate groups has more than doubled. The bank observes that higher the debt, greater the chances of default. In all such cases the NPA also rises.

Recall, there was much brouhaha over the Rs 53,000 crore one-time loan waiver to the farmers. It was a political decision, obviously to earn populist mileage. In this case, the banks did not lose a penny as the Central Government repaid the full amount to the banks.

In other words, the Government like a Good Samaritan repaid the farm loans. But farmers who have got their loans waived are likely to have problems in future. The banks, as it happened in previous farm loan waivers, bar the farmers from getting loans in future.

As is well-known, an individual who fails to repay even one installment in time is harassed by banks’ goons, who are even known to have forcibly taken possession of their automobiles or other assets. The corporate do not have any such fear. They can continue to take loans for one or the other group. Since they are organized, through lobbying they use their clout against any rule that goes against them. Unfortunately, farmers or individuals don’t have such privilege.   

The corporate waiver is a continuous process. The RBI records show the figures from 2001, when Rs 6446 crore was waived. The figures from 1991 to 2000 are not available but RBI sources say it would be large amount. Apparently, each year the amount has gone on increasing in subsequent years. It was Rs 8711 crore in 2002, Rs 12021 crore in 2003, Rs 13559 crore in 2004, Rs 10823 crore in 2005, Rs 11,657 crore in 2006, Rs 11621 crore in 2007, Rs11653 crore in 2008 and Rs 15996 crore in 2009.

Since 2010, it has been a whopping figure when it touched Rs 25019 core, Rs 23896 crore in 2011 and Rs 20892 crore in 2012. Worse, in 2013 when the economic indicators have been plummeting and growth almost came to standstill, the figure touched an all-time high of Rs 32,218 crore!

During the ten years, the total money that banks lost was Rs 204,512 crore. They could recover only partially against these loans to the extent of Rs 37,955 crore mostly against some collateral. But if another Rs 90,887 crore that has been restructured – or put on extended term – is added to this figure, the waiver mounts to Rs 2.32 lakh crore.

The RBI numbers have showed that as GDP figures were rising, banks added Rs 4,94,836 crore to their bad loans between 2007 and 2013. In other words, the “gain” for economic indicators was a gross loss for the banking sector.

It is interesting to note that as bad loans go on mounting, the banks procedure for writing it off reduces its NPA. As actual bad loans touch Rs.4.94 lakh crore, the banks do jugglery to show it at reduced level of Rs 3.5 lakh crore. It comes to a figure of Rs 1.44 lakh crore – that has been written off officially. It also means that the common man, who is putting his money in the banks, is the biggest loser and at the highest risk. The money lent is mainly deposited by small depositors

During the years of supposed growth, the corporate have also gained in terms of reduced lending rates. It meant they paid less interest for receiving higher amounts of loan apart from the tax stimulus they received from the Government. The common small depositors, who contribute the maximum for the growth of banks, end up being the net losers. They received less interest and it is continuing even now.

The sum up is that more the small depositors lose more the corporate gain in terms of loan waivers, interest waivers and the allowance they gain to repay loans in a staggered manner. In many cases, the interest that is waived is not shown in the books. The advantage for the corporate is they need not show these gains as profit. Thus, shareholders lose in terms of dividend and the Government loses its taxes.

Indeed, the banking system is too messy. Monitoring is too weak and is being taken benefit of by the unscrupulous large ten borrowers. Banks have freedom to function the way they like. This puts many of their practices beyond scrutiny. Restructuring of loans is one such procedure. In reality, it takes large sums away from NPA though the banks do not have access to such funds. In many cases, the restructured loans are categorised as bad debt as time passes. While the procedure window dresses the books, it does not reduce the risk a bit.

Indian banks are into huge losses. Whatever profit they are showing on books is a sham. It gives dividend to the Government but everyday their books are dipping. The banking sector is in grave danger.

Now the common depositors, if not the Government, have to come together to stop the open defrauding they are subjected to. This is a serious challenge to the health of the banking sector and the Indian economy because banks remain its base. Else, India may be repeating a Lehman scandal and it would be too difficult to recover.---INFA

(Copyright, India News and Feature Alliance)