A loan taken with the sole intention of siphoning off funds for personal gains is bound to irreversibly damage the bank’s image
According to a statement by the Minister of State for Finance, Bhagwat K Karad, in Parliament, non-performing assets (NPAs) or bad loans of banks declined from a high of around Rs 1036,000 crore as on March 31, 2018, to Rs 896,000 crore on March 31, 2020, and further down to Rs 834,000 crore on March 31, 2021.
The choice of March 31, 2018 has special significance. Under the UPA, particularly during its second tenure 2009-2014, banks recklessly gave loans to corporate houses and businesses without assessing the viability of the projects and conducting due diligence. The ability of the concerned projects to generate the required cash to service the loans was in doubt from day one. There was an element of ‘inevitability’ in such loans becoming NPAs. Indeed, these did become NPAs but were not recognized in the balance sheet.
In 2015, at the behest of the Modi-government, Reserve Bank India (RBI) ordered an asset quality review (AQR) of all commercial banks to identify stressed assets and make necessary provisions in the balance sheet. As a result, their gross NPAs rose from about Rs 323,000crore as on March 31, 2015 to Rs 1036,000 crore as of March 31, 2018.
Accordingly, in 2016, the Government enacted the Insolvency and Bankruptcy Code (IBC). It overrides other subsisting laws and gives a strong handle to banks for resolving NPAs with in a strict time frame. In 2017, it amended the Banking Regulation Act (BRA) giving RBI the powers to force banks to act if they do not on their own. On February 12, 2018,the RBI issued a circular that provided a foundational basis for resolving NPAs.
As per this circular, for accounts with aggregate exposure greater than Rs 2,000 crore, as soon as there was a default in the account with any lender, all lenders – singly or jointly – shall initiate steps to cure the default by preparing a resolution plan (RP). This needed to be done within six months from the date of default failing which proceedings would be initiated (albeit under IBC) by the National Company Law Tribunal (NCLT).The NCLT would get six months to complete the resolution process.
According to Karad, public sector banks (PSBs) have recovered over Rs 500,000 crore (including private banks, the recovery would be even higher). Against this, the decline in NPAs between March 31, 2018, and March 31, 2021, is only about Rs 200,000 crore. Even this gain will be wiped off once the impact of lifting the embargo on recognizing bad loans (imposed last year to give relief from Covid, this was removed on March 24, 2021) is captured.
This shows the emergence of fresh NPAs during this period. Pertinently, these also include loans given before 2014 but did not come under RBI radar earlier during the AQR exercise.The problem is not just with (i) the pace and quantum of recovery but also (ii) more and more skeletons coming out of the cupboard.
Regarding (i), according to IBBI, in 363 major cases, banks have taken hair-cut of 80 per cent on an average (for some such as Videocon, it is even higher at 95 per cent). That apart, the timelines were rarely honored thanks to the hurdles created by competing suitors and delinquent promoters by challenging the NCLT award.
Ironically, a revised circular issued by the RBI on June 7, 2019 – under directions from the Supreme Court- has seriously undermined the IBC process itself. It gives banks 180 days to come up with RP (in addition to 30 days to enter into an inter-lender agreement or ILA). If they do not, they are required to make an additional provision of 20 per cent. If they donot finalize the plan within 365 days, an additional 15 per cent provision has to be made. Put simply, under this circular, banks are not bound to act in a time-bound manner.
As for (ii), the emergence of fresh NPAs is a bigger worry when we consider the fact that a big slice of this is due to a flurry of frauds which have led to four major financial institutions, Yes Bank, Punjab and Maharashtra Cooperative (PMC) Bank, Infrastructure Leasing and Financial Services (IL&FC), and Dewan Housing Finance Corporation Limited (DHFL) towards bankruptcy in the last three years. During this period (2018-20), the Central Bureau of Investigation (CBI) registered bank fraud cases involving amounts worth over Rs 100,000 crore. The frauds are an outcome of a well-orchestrated game plan in which bank or FI officials are actively involved. These are systemic faults. At a fundamental level, these have to do with a sense of fearlessness amongst fraudsters and bank officials that even if they do something horribly wrong, they will get away scot-free.
During the initial few years of the NDA government, Prime Minister Narendra Modi’s repeated exhortation that he will put an end to what he described as ‘phone banking’ – a euphemism for giving loans merely based on verbal instruction given by top political brass – instilled confidence. It signaled that henceforth, banks will only sanction loans based on due diligence and assessing the viability of the project for which the loan is taken. However, those expectations have been belied.
There is nothing on the horizon to show that things will change for the better. Far from that, a recent decision of the government to let CBI look into only some ‘extraordinary’ cases such as IDBI Bank-Kingfisher Airlines (even as most other cases will be investigated by specialized agencies such as the Serious Fraud Investigation Office) has acted as a further dampener. An argument that this is necessary to protect bank employees whose “genuine business decisions” could go wrong is untenable. Such employees who do their job honestly need not fear even if they are under CBI scanner.
A loan that turns bad due to a genuine business decision going wrong, say, due to adverse economic conditions hampering the ability of borrower firm generate cash, always lends itself to becoming standard as and when conditions improve. In sharp contrast, a loan that was taken with the sole intention of siphoning off funds for personal gains is bound to suffer irreversible damage. This needs to be dealt with an iron hand; sadly, that is not happening.
The government is also quick to provide succor to banks in a variety of ways, be it capital infusion by way of budgetary support, or sale of stressed loans to state-owned asset reconstruction company (ARC). Thus, having already pumped Rs 300,000 crore during the last five years or so, it is giving Rs 200,000 crore this time by giving a sovereign guarantee for the security receipts (SRs) to be issued by the recently set up ‘bad bank’. This breeds complacency.
With so many loose ends in the subsisting system, it is only natural that any perceptible decline in NPAs will continue to elude us. Instead, this monster will only grow in size unless three basic conditions are met — (i) fear sinks in that the fraudsters (and their co-conspirators in the banks) will end up paying a heavy price for their wrongful acts; (ii) the efficacy of IBC mechanism is restored by reinstating RBI’s February 12, 2018 circular, and (iii) the government bail-out is considered as a last resort only.
(The writer is a policy analyst. The views expressed are personal.)
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