Spotlight

New Delhi, 18 March 2016

NPAs: Bailout No Solution

FARMERS DON’T SWINDLE CRORES!

By Vinod Sharma

The country has been left high and dry with a huge debt burden of over Rs 9000 crores of defunct Kingfisher Airlines with its promoter Vijay Mallya fleeing to London. That too despite a look-out notice and proceedings in the Debt Recovery Tribunal for recovery from the proceeds of his assets and properties filed by a consortium of 17 banks led by the State Bank of India.

Underscoring, the problem of non-performing assets (NPA) or bad loans and find ways to strictly enforce  recovery laws to curb the menace of bad debts. Indeed the King of Good Times case is just the tip of the iceberg as there are a large numbers of Mallyas in the country, who have managed to swindle the common man’s hard-earned money by using their high worth, influence and conniving tactics to dupe State-run banks.

Recall, at the annual Gyan Sangam, a retreat of Chiefs of public sector banks, financial institutions and insurance companies held in Pune last year on the issue of bad loans and consolidation and Government steps to reform the crisis-ridden banking sector, the meet focused on optimizing capital digitizing processes, strengthening risk management, improving managerial performance and banks financial inclusion with Prime Minister Modi promising no Government interference in banks commercial decisions.

However, this time at Gurgaon the focus was on the  problem of NPAs estimated at Rs 3.7 lakh crores and , stressed assets of about Rs 8 lakh crores of the total advances of PSU banks and the Government efforts to bail-out the distressed sector. The meet was significant against the  backdrop of Finance Minister Jaitley’s Budget announcement on consolidation among public sector banks.

Moreover, Jaitley was firm in implementing a roadmap to reform the banking sector and directed the NPA-bugged banks to clear their ledgers and balance sheets by effecting speedy recoveries. Towards that end, he stated the need to amend the Debt Recovery Tribunal (DRT) Act and SARFESI Act which the Department of Financial Services (DFS) was looking into. To provide more teeth to recovery laws, the Government is also hopeful of passing the Bankruptcy and Insolvency law in the Budget session’s second half.

The NDA Government also advocated having a strong banking system rather than many large banks. “As part of strategy for consolidation of banks, an experts’ group will be constituted soon”, Jaitley added.

Sickened by whopping bad loans of a handful of top corporate houses, public sector banks are in dire straits. Though the Government has provided Rs 25000 crores in the Budget for bailing out and strengthening the banking sector, the amount is too meager to meet the yawning fiscal needs for banks to have clear balance sheets.

Asserted Minister of State for Finance Jayant Singh, “We have a very good sense of the problem of bad loans and will continue to provide funds to strengthen banks”. The Government further plans to infuse Rs 70,000 crores over the next four years ending March 2019. Of this, Rs 25000 crores each would be in 2015-16 and 2016-17 and Rs 10,000 crores for 2017-18 and 2018-19. But the overall capital requirements of banks over the four-year period totals Rs 1.85 lakh crores.

Questionably, what drove these banks to reach this sorry pass and cause colossal losses of  public money by few corporate houses, who are now willful defaulters? Perhaps the over-zealous banks themselves!

Clearly, the bad loan crisis gripping the country’s Rs 95 trillon banking sector did not happen overnight. Think. For several years State-run banks were intensively engaged in the volume game to inflate their balance sheets and appease their masters in Government. Particularly in 2011-13 when every bank rushed to give heavy loans to corporate bigwigs, without considering credit perceptions, repayment abilities, credentials and intentions.

Interestingly, in the pre-NPA crisis period of State-run banks, private banks topped the list of highest NPAs, with ICICI bank at the top. But the scene gradually changed and by March 2009 many State-run banks scored rapidly on the NPA front. The country’s largest lender, State Bank of India (SBI) and Indian Overseas Bank were at the top.

Today, State-run banks facing a grave crisis due to NPAs, which constitute over 90% of the total bad loans of the industry. According to a report, 9 out of 10 most stressed banks are Government –run and are facing RBI deadline to clean up their balance sheets by March 2017. The RBI Governor Raghuram Rajan has made plain that the banks need to deal with the NPA problem instead of dilly-dallying and worsening the situation.

According to Global Consultancy Credit Suisse report the top ten corporate houses owe staggering loans and assets of Rs 7 lakh crores to various State banks and financial institutions. This huge amount is equal to the GDP of Morocco and double the GDP of Uzbekistan. 

Shockingly, it is not the poor farmers or the middle class who are defaulting, it’s the country’s super rich, businessmen and upper middle class with loan amounts totaling over Rs 1 crores who account for a staggering over 73% of unpaid loans to banks. What is worrying is that while most banks are readily giving loans to unreliable persons of high net worth, people are struggling to get loans to even educate their children!

It is incomprehension, why these banks continued to virtually “help and protect” the ultra rich willful defaulters for several years even as All India Bank Employees Association had been constantly demanding at least putting names of top defaulters in the public domain. It was only in June 2014 that their demand was accepted and a list of top 50 loan defaulters was announced. The biggest defaulter in this list was, of course, Kingfisher Airlines.

Ironically, while banks shut their doors on small farmers, traders and other poorer sections of society by denying them even petty loans up to Rs 50,000, they liberally offered huge amounts to big business houses and influential people, who swindled rather than repay. Resultantly, a large number of small borrowers and petty farmers from Karnataka, Maharashtra and even prosperous States like Haryana chose to commit suicide for very meagre loans owed to money lenders, who charged extremely high interest rates and penal interests.

Who is responsible for their tragic ends? Undoubtedly, time has come to overhaul the seemingly pro-rich and anti-poor banking system by ushering in large-scale banking reforms. Bailout packages won’t serve the purpose of dealing with the menace of ever-increasing bad loans.

After all, public money can’t be allowed to be swindled by the corporate and then provide bailout to NPA-ridden banks to make up their incurred losses. It is the responsibility of banks to recover their loans from bigwigs, sitting on public money, through all legal means and selling their properties.

In sum, financial help to State-run banks is a temporary arrangement as ultimately the affected banks would have to convert their NPAs into active assets to bring in banking discipline and strengthen the Indian economy. Their motto should be: Trust small and marginal farmer, trader and student, than speculating on fat corporate houses just to flatten their ledgers and show grandiose profit.----INFA