Bank employees dub it as the big corporate fraud. Economists and some political leaders blame it on the downturn since 2008. Many of the corporates themselves prefer to switch the conversation to massive loan bailouts to farmers. But Reserve Bank of India deputy governor K.C. Chakraborty was clear as day during his presentation before a bankers’ conclave last month. “The existing levels of non-performing assets (NPAs) are manageable, but if corrective actions to arrest NPAs are not initiated, the stability of the financial system will be at great risk.”
Chakraborty’s presentation revealed that medium and large enterprises account for nearly 50 per cent of the NPAs or bad loans of public sector banks (PSBs). These companies’ share of bank credit has increased from around 40 per cent in 2009 to over 48 per cent in 2013. “If you tackle the top 500 to 1,000 defaulting companies, then you’d have taken care of the bulk of the NPAs,” says Mahesh Vyas of the Centre for Monitoring Indian Economy. “Farm loan defaults are but a small part compared to corporate NPAs.”
As a percentage of total bank credit, gross bank NPAs constituted 3.3 per cent in March this year, rising to 3.7 per cent by end-June. This figure could reach 4.4 per cent by March 2014, turning almost Rs 1 trillion worth of bank credit as NPAs within such a short span, rating agency crisil stated in its report last month. That’s why the government is increasingly being put under pressure to act and put the spotlight on corporate delinquency or what some call wilful fraud.
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The numbers are huge. According to the All-India Bank Employees’ Association (AIBEA), bad loans have gone up from Rs 40,000 crore in 2008 to Rs 1,90,000 crore in 2013. “In addition to the official bad loans data, there is Rs 3,25,000 crore of hidden bad loans in the name of restructured loans (often dubbed CDRs, or corporate debt restructuring) that are being passed off as good loans,” says C.H. Venkatachalam, general secretary, AIBEA.
Currently, the list of NPAs is not made public and, as in the case of the credit bureau, the information is shared between banks. That is not to say it stops banks from offering more loans to defaulting companies. The past track record has been dismal. Other than threatening to blacklist habitual offenders, the banks tend to write off the bad debts from their books while trying with little success to recover their dues. RBI data indicates that banks recover less than 10 per cent of the written-off loans.
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In many instances, as in the case of Vijay Mallya’s Kingfisher Airlines, banks continue to bail out corporates in a bid to salvage their credit. Therein lies a catch, as Chakraborty points out, that banks are increasingly using restructuring as a tool for NPA management. “Gross NPA in itself (is) not a problem but in conjunction with restructured advances, they have emerged as a major issue,” says the RBI deputy governor. Debt restructuring has, in fact, emerged as a means of evergreening debts, admits a retired senior banker.
Many blame the rise in NPAs and firms seeking debt restructuring to the slowdown in the economy. As economist Ila Patnaik puts it, “It is not a name-and-shame game as it is basically a downturn story and the banks need to provision properly.” The RBI report, however, points out that the rise in NPAs started not after the 2008 financial crisis but at least two years prior to that. Many of the defaulters are big corporations who have the capacity to repay but are unwilling.
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The problem is there is no unanimity on the severity of the problem. A senior banker, who declines to be identified, says that while “NPAs are certainly a priority area that need to be addressed”, the situation is not alarming as “we have passed through such phases in the past and have corrected course”. The finance ministry too views the problem from a dimension different from the rbi’s. “We are concerned and have given instructions to give early warning signals, but at the same time, the problem is not so huge as to lose sleep,” says a senior finance ministry official.
Though Union finance minister P. Chidambaram has been speaking on the issue of corporate defaulters and the need for better monitoring of the top 30 defaulters in every bank, there has been little forward movement to ensure its implementation, say bankers. Some, in fact, allege that instead of being taken to task, many of the big corporate defaulters were being provided incentives in the form of concessions to repay the loans.
“In many of the cases of restructuring of loans, it works well with no loss, but in many other cases there is some sacrifice on the part of the bank,” says K. Muraleedharan Pillai, vice-president of the All-Kerala Bank Employees’ Federation, an associate of the AIBEA. He cites the case of Ascent Telecom, which went in for corporate debt restructuring in 2012-13 for an outstanding of Rs 678 crore. The consortium of banks led by Canara Bank took a hit of Rs 103 crore in the process.
In the last six years, bad loans to the tune of Rs 1,41,295 crore have been written off. Venkatachalam’s plea is that wilful default should be made a criminal offence and all defaults over Rs 1 crore should be made public. In addition, there must be a probe of any possible nexus. As we approach another major election, hopefully the government will take a more proactive view on the ever-growing debts of a few moneybags.
The Naming and Shaming Game
Source: All India Bank Employees’ Association; (in Rs crore)
Top 50 Loan Defaulters:
Apropos the article A Frisky Proposition (Dec 16) on the non-performing assets of public sector banks, it has forgotten to mention a vital aspect: political interference. Let me give a personal example. I had purchased shares in Indian Overseas Bank which used to have an excellent balance-sheet and negligible NPAs. It seemed a good investment for some time since its share price was going up, as was the dividend. In 2009, however, it started plummeting rapidly. I then discovered its NPAs had shot up dramatically. On digging deeper, I found it was mainly because the bank had been forced to take over a bankrupt Pune-based urban cooperative bank because of political pressure and take on liabilities worth Rs 1,000 crore. Unless the banks are insulated from politicians and stringent penalties are imposed on defaulters, NPAs will continue to bedevil our banking system.
D.L. Narayan, Vishakhapatnam
The global financial crisis and India's unexpectedly savage economic slowdown have certainly exacerbated the problem of NPAs, but there are other factors as well. A handful of corporates have borrowed four trillion, roughly the net worth of the banking sector, and they are in trouble. The viability of many projects that were so generously funded was suspect from day one. Private banks have been more discerning than the public sector ones. A mess in the banking sector would constrain the availability of credit for economic revival. There is no harm in thinking whether 70 per cent of the banking system really needs to be privately owned.
Ashok Lal, Mumbai
Apropos of A Frisky Proposition (Dec 16), NPAs can be classified into four categories: demand contraction due to slowdown, wilful default, misjudgement on capacity of Indian market/export basket and economic policymaking. The nexus between unscrupulous businessmen and the neta-babu class is not unknown. Some years back, ex-FM Yashwant Sinha had remarked that people come in Marutis to take loans and return in Mercs to fight default recovery cases.
The NPAs can be classified into 4 categories:-
Demand contraction due to slowdown
Willful default - no shortage of folks if you see the list
Misjudgement on the capacity of the Indian market or the export baseket
Economic Policy making - if you see the list of infrastructure companies/highway projects
The nexus between unscrupulous businessmen and politico-bureacratic class is not unknown.Some years back , Yashwant Sinha had remarked that people come in Maruti 800 to take loans and come in Mercedes Benz and equivalents to fight default recovery cases with the financial institutions.
What does the business community represent in India? To me, Mr. Kumar Mangalam Birla represents an identity, that can do for India, what she requires of them. Mr. Laxmi Mittal is the face of the European and U. S. steel industry. He is seen to be British, and French, and he was holding a passport, that was Indian, if I am not mistaken.
In a liberal democratic economy, the engine of the democracy is economics. Business drives govt. It seems, that the problem with democratic function, is that business has been given the function, that is the most relevant, and has a primacy above other functions. In the west, without business, there would be no govt., and the world has this functioning of the modern govt.. What if, that in India, the business community is not given the burden of running the economy of the nation, but does function nonetheless, as a relevant activity, but not identified as the only activity, the primary activity? It seems, that people like Mr. Kumar Mangalam Birla sees the relevance of all society, when he functions as a businessman, to his business. What if, he were not to see, that situation, when he was a businessman? The Marwari community has come into it's own, with liberalization of the economy. Apparently, Mr. Birla does not run industry, but supplies the inputs and raw materials, and he is responsible for the financial identity of the same (relevant industries). Why does the govt. intimate that he and others like him, should not be responsible only for his own business, which he may and apparently responsibly runs?
The article has forgotten to mention political interference.
Let me give an example. I had purchased shares in Indian overseas Bank, which had an excellent balance sheet and negligible NPAs. For some time, it seemed to be a good investment since its share price was going up as was the dividend. Then, in 2009 it started plummeting. I then discovered that the NPA's shot up dramatically. On digging further, I found that it was mainly on account of the bank being forced to take over a bankrupt Pune based urban co-operative bank due to political pressure and take on liabilities of nearly Rs.1,000 crore. Unless banks are insulated from politicians and stringent penalties are imposed on defaulters, NPA's will continue to bedevil our banking system.
True - after 10 years of misrule, the banks are on the verge of collapse because of NPAs.
But why is the media not pointing an accusing finger at the banks that approved such loans, even to those who had no financial record?
The last two words ought to be : publicly owned.
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