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Loan Write offs is the “Biggest Scandal of the Century”
A Supreme Court bench headed by chief justice TS Thakur has directed the finance ministry to form a panel to look into the issue of bad loans saying, ‘something is not working’ in the present system and has to be fixed. This is a great opportunity to ensure that corporates do not take advantage of loopholes and repeated restructuring of debt at the cost of the exchequer. But a fool-proof set of recommendations will require a committee comprising people with knowledge, experience and the courage to speak out, no matter whose interests are hurt. 
 
The problem of bad loans is gigantic. The total gross non-performing assets (NPAs) of the banking system were reportedly Rs4 lakh crore at the end of December 2015. Further, the Indian Express has reported that public sector banks (PSBs) have written off a massive Rs1.14 lakh crore in the past three years alone. Also, as Prashant Bhushan pointed out, there seem to be serious discrepancies even in the reporting of NPA data. 
 
More importantly, bankers’ attempts to blame the mammoth bad loans on the absence of a bankruptcy law is also disingenuous, given the flaws in the draft Bill; in fact, unless corrected, that legislation too will go the way of the SARFAESI Act which had been touted as the solution to bad loans. While the case has been adjourned to 19th July, the key issue today is to have a committee that will put facts and solutions on the table. 
 
Separately, Mr Bhushan has questioned the Reserve Bank of India’s (RBI’s) continued denial of information related to defaulters, even after the SC judgement of 16 December 2015 (Transfer Cases (C) No. 91-101 of 2015). He has argued for disclosure of information and for framing a set of issues that probably need to be decided to end the ever-growing bad loans of large corporate houses.
 
While there is a hue and cry in the media each time the government writes off loans to farmers, most people are unaware that, over the decades, the finance ministry has been providing a few thousand crores to banks every  few years to help them maintain capital adequacy. According to one estimate, PSBs need equity capital injection of Rs2.4 lakh crore by 2018 to meet the Basel-III norms; this is not going to be raised through a sale of equity to the public, unless their financial performance improves dramatically. 
 
Although some argue that this does not amount to a backdoor bailout of banks, it is hard to see it any other way when the infusion happens every few years and banks are lobbying and jostling to get these funds, even as their profits and share prices decline and bad loans keep rising. Probably with this in mind, Prashant Bhushan has framed several important issues to be considered by the Supreme Court (WRIT PETITION CIVIL NO. 573 OF 2003) on the bad loan issue. These include:  
Safeguards need to ensure that loans are not restructured without good reasons or restructured on fair terms; 
Mechanism to ensure that banks obtain adequate security for loans to corporates; 
Mechanism to ensure prompt action by banks to recover loans; 
Audit instrument to prevent siphoning of assets of debtor companies through under/over invoicing or through sister entities; 
Need to ensure that mortgaged assets are not sold off to Asset Reconstruction Companies (ARCs) at arbitrary prices and the further sale of those assets by ARCs;
Clear definition of ‘wilful defaulters’ and making them ineligible for further loans from PSBs, etc. 
 
However, one crucial issue is missing from this list. It is the massive ‘technical write-offs’ by PSBs which were dubbed the “biggest scandal of the century” by Dr KC Chakrabarty (ex-deputy governor of RBI and ex-chairman of Bank of Baroda and Punjab National Bank), in response to a query by Indian Express on the bad loan issue. 

This is especially important since some bankers have denied that these write-offs are a scam and insist that the “write-offs are done as a prudent measure and in accordance with the regulatory guidelines laid down and, therefore, cannot qualify as a scam.” But it is a fact that bankers like ‘technical write–offs’ because they remove bad loans from their books and also give them a tax advantage. In the past two decades, banks have written off several lakh crores of rupees as technical write-offs. The Indian Express reported that Rs1,14,000 crore has been written off in the past three years alone. 
 
We had an opportunity to catch up with Dr Chakrabarty recently and asked him to explain the genesis of what he calls a big scam. His response is startling. He says that there is no policy for ‘technical write-offs’; no justification proposal is required to be put up; there is no formula to decide extent of write-off  and nobody knows what happens after the write-off, even though the loans are backed by assets. 
 
Dr Chakrabarty says, “If a company has borrowed Rs20,000 crore and has assets of only Rs8,000 crore, then a bank should be allowed to write off only Rs12,000 crore that is not backed by assets. But, instead, the entire amount outstanding on the books and due is written off.” Banks do such overstatement of provisions to get false tax deduction. The practice has not developed overnight or in the past decade. Dr Chakrabarty tells us that ‘technical write-offs’ are a legacy of economic liberalisation and started in 1993, when banks were asked to implement prudential norms on income recognition, asset classification and provisioning. PSBs as a group reported a loss after making provisions for accumulated loans over the years in accordance with the new norms. 
 
RBI has issued a detailed circular on the issue. It says, “Technical or prudential write-off is the amount of non-performing loans which are outstanding in the books of the branches, but have been written off (fully or partially) at the head office level. Amount of technical write-off should be certified by statutory auditors.” It has several precautions and guidelines for write-offs, but everything finally hinges on one sentence: “Banks should either make full provision as per the guidelines or write off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors/tax consultants. Recoveries made in such accounts should be offered for tax purposes as per rules.” Mysteriously, RBI advised the banks that, “in consultation with your chartered accountant you can create an appropriate procedure for technically writing off the advances.” 
 
Dr Chakrabarty, a senior banker, should know the major implication of that sentence. He says, “Anybody who knows the financial system in this country can explain why and how this has happened,” and has been going on for 23 years. Didn’t a series of RBI governors since 1993 notice what was happening and question it? He says, most governors did not get involved in the nitty-gritty of implementation of broad policy decisions. 
 
According to Dr Chakrabarty, “A whopping Rs3.5lakh crore have been written off for industry in the past 15 years through technical write-offs, but nobody talks about it. And remember, this is not a presumptive loss; it is a real loss. The presumptive loss would be four times this amount if you include the interest that would have accrued on the loans and would be added to the liability.” It is important to note that Dr Chakrabarty had spoken about the danger of ‘technical write-offs’ at an annual bankers’ conference in 2013, when he was RBI deputy governor. He also warned that "restructuring of loans with retrospective effect has killed credit quality in banks.” But nobody listened.  Any committee set up by the Supreme Court will need to fix the policy on technical write-off first. There is no point in tightening the rules, unless this gaping loophole is fixed.

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COMMENTS

manoharlalsharma

1 year ago

these r not scandals but distribution of profit out of business of POLITICS started with bying of JEEPS and motor cycles for INDIAN military and it was 41 lacs when population were illiterate rate was 80% so no one has voice in Parliament and thereafter only added ZEROS now a days a sheet of paper is short for writing ZEROS.

B. Yerram Raju

1 year ago

The Banks cried foul when farmers'loans were written off. They hesitate to entertain one time settlements for MSMEs even though guidelines provided for them. Supreme Court had to remind the Central Bank of India of the statutory flavour of the RBI regulations in the Civil appeal No.4970-4971 of 2009 arising out of a Special Leave Petition in the case of a small enterprise. Loan write off and compromises are mostly entertained for advances where the banks feel that the collateral security value is inadequate to recover the advances outstanding by their sale. But where it is contrary they institute legal proceedings and these are again mostly against the MSMEs. NPA after categorisation as such remained for over 9 years in banks'books for the ilk of Mallya-likes while the banks are intolerant for MSMEs whose loans overdue because of non-payment of the bills by the State Government departments for years together. Even the Courts pass inconclusive orders admitting the petition filed by such enterprises. Several suppliers like SMAAT who are in the field of water purification installations, or solar energy equipment, or defense equipment and components, whose market lies mostly with the state and central government departments are stuck with crores of rupees of debt and consequent NPAs with their banks - SMAAT India Pvt. Ltd., Vs. Executive Engineer, Panchatraj Engineering Department, Karnataka in the High Court of Karnataka. The Department under PPP was supposed to supply raw water and power to the water treatment plants set up in 400 panchayats and they failed to supply after the plants were installed. The unit had to incur huge loss on account of the infructuous installations and the user charges recovery. Their loss from similar overtures from the Governments of AP, Madhya Pradesh apart from Karnataka reach Rs.220crores. While they now diversified their markets to sustain their entity, they could not help becoming NPA. In such cases since the bank has adequate collateral to cover their advance they just give notice of acquisition of properties mortgaged to them. Loan settlements, write offs and restructuring have all become a mockery of regulation.

Mahesh S Bhatt

1 year ago

Congrats we are copying USA /UK /Japan models of economic bubbles & crashes & vanishing rupess legally.Money has lost value wait for crash. Mahesh

REPLY

saravanan ramamoorthy

In Reply to Mahesh S Bhatt 1 year ago

Those who pay the taxes - individuals - are cheated at the both the ends, if they have both PSU bank and private bank accounts...those who dont pay taxes are benefitted both by PSU and private banks..

Ashok m Rane

1 year ago

Loan Write Offs is the Day-light robbery of Public Money, continued for years together. Every Year end the Banks r writing off crores of Rupees in d name of Prudential Write Offs to accomodate Bad Borrowers. It has become a culture now a days: to Borrow freom PSBs, do not repay - turn the account as NPA and get it written off periodically and be free to borrow from some other PSB as a different entity.RBI and Banks do not want to disclose the details which is a proof that they r involved in such deals. What can a common man or Bank Unions, Bank Employees do to resist this loot?

REPLY

saravanan ramamoorthy

In Reply to Ashok m Rane 1 year ago

An enlightenment mission needs to be created across the nation to avoid such write off in future. Economics subject should be made compulsory in schools, starting from sixth class onwards.

manoharlalsharma

1 year ago

Loan Write offs is the Biggest Scandal of the Century the open political 'LOOT' of BANK PROFITS so say NEGATIVE bank BALANCE SHEETS .

Simple Indian

1 year ago

The way politicians write off loans to farmers every election eve, they have been doling out loans to industrialists far beyond their repaying capacity, that too against collateral which doesn't even cover the loan amount, forget the interest components. Vijay Mallya is only the latest in this long list of beneficiaries due to his political clout. So, whether it's farmers' loan waivers or "technical write-offs" by PSBs to large corporations, it's politicians who trigger the activity. PSBs have to follow the dictats of the Finance Ministry / RBI hence, have to "bear the losses" in both cases. It's us taxpayers who ultimately suffer, as the govt has to shore up more revenue to cover these write-offs by raising taxes. Unfortunately, our Constitution doesn't empower the CAG to stall potential loss to the exchequer due to political or administrative indiscretions. Any country can progress only if there is political will, and sadly India has always lacked in this area, which is why it is in such a sorry state. Mera Bharat Mahaan !!

Devidas Tuljapurkar

1 year ago

All those are systemic frauds. It is RBI prescription which enables individual banks to resort to such practices. RBI Directors are party to implementation of all those guidelines. RBI has failed miserably. All are aware how RBI officials those who visit Banks for AFI, SNAP AUDIT etc are entertained and subsequently how magnanimous they become in permitting bank officials to suppress the NPA so as to avoid provisioning and thus to show enhanced profits. This is being done on regular basis & precisely this is the reason why Asset quality Inspection has unfolded huge NPAs and thus 12 out of 19 PSBs have booked loss in third quarter of this year. RBI Inspectors i.e. officials and nominee directors should be made accountable and answerable for all those legacies. Their failure is more grave than individual banks failure. Annual Financial Inspection is made available to the directors only in the board meeting which discusses the same and is taken back immediately thus even directors are not in a position to go through it carefully to act upon leave apart all others. Why the same should not be made transparently available to all stake holders. RBI is looked upon mistakenly as pious and psycrocent is the root cause of this which illusion needs to be removed. Devidas Tuljapurkar

REPLY

Ashok m Rane

In Reply to Devidas Tuljapurkar 1 year ago

I fully agree with ur views. RBI is only responsible as they only issue/frame policies in this matter. NPAs should not be written off. Let they be continued in Bank Balance sheets.

Devidas Tuljapurkar

1 year ago

All those are systemic frauds. It is RBI prescription which enables individual banks to resort to such practices. RBI Directors are party to implementation of all those guidelines. RBI has failed miserably. All are aware how RBI officials those who visit Banks for AFI, SNAP AUDIT etc are entertained and subsequently how magnanimous they become in permitting bank officials to suppress the NPA so as to avoid provisioning and thus to show enhanced profits. This is being done on regular basis & precisely this is the reason why Asset quality Inspection has unfolded huge NPAs and thus 12 out of 19 PSBs have booked loss in third quarter of this year. RBI Inspectors i.e. officials and nominee directors should be made accountable and answerable for all those legacies. Their failure is more grave than individual banks failure. Annual Financial Inspection is made available to the directors only in the board meeting which discusses the same and is taken back immediately thus even directors are not in a position to go through it carefully to act upon leave apart all others. Why the same should not be made transparently available to all stake holders. RBI is looked upon mistakenly as pious and psycrocent is the root cause of this which illusion needs to be removed. Devidas Tuljapurkar

shadi katyal

1 year ago

It is evident that not only PSU but many socalled private companies have been granted loans and if Modi sarkar has guts to look into all these loanbs will find that managers involved all retired with lacs as for granting such loans.
Air Inid is a good example and banks are all PSU. Private banks will not give such loans but all such loans are on recomendations of VIP people.
Farmers can commit suicide as they are poor and have no VIP lobby.
We as a nation must move into 21st century if we wish to be productive

REPLY

Ashok m Rane

In Reply to shadi katyal 1 year ago

In case of Private Banks, I think Govt. Funds r not involved. No doubt Depositors r cheated.

D S Ranga Rao

1 year ago

Very sad state of affairs. Public money has been frittered away like peanuts by all and sundry without any accountability and answerability. No more of it, please. Also, every rupee lost must be recovered from the pockets of all those who looted it and those who facilitated the loot and plunder and if they fail to repay, they should be sent to jail without any compunction. Now that the matter has come under the scanner of the Supreme Court, no stone should be left unturned to recover all the lost money to the last rupee, otherwise, the government should go failing to comply with the apex court's ruling.

Vinay Isloorkar

1 year ago

In street language, the bankers have been following " whose father, what goes ! " Public sector Banking became a joke from the Janardhan Poojary " loan mela " days. It has been followed by jingoistic " social banking ", " priority sector lending ".

The only essential ingredient required to put it back on track is the political will. Hopefully, the netas' cabal won't cry foul this time around over the Supreme Court's " judicial activism"

Shrikant Dattatraya Sahasrabuddhe

1 year ago

Mr.K.C.Chakraborty has been hitting Bulls eye since long and by giving lead publicity you are furthering the cause of public interest very very admirably.Full support to you.

Shrikant Dattatraya Sahasrabuddhe

1 year ago

Mr.K.C.Chakraborty has been hitting Bulls eye since long and by giving lead publicity you are furthering the cause of public interest very very admirably.Full support to you.

S Santhanam

1 year ago

Dr chakraborty was chairman of two large size banks before becoming DG
of RBI. Can he say he did not approve any technical write-offs during his tenure as chairman. Answer would be a clear no. He had approved a number of proposals for write-offs. At that time he did not feel bad or felt it a scam. After becoming DG too he didn't do

anything to stem the rot or stood
against the practice of such technical
write-offs. Now after enjoying all the
comforts of chairman and DG he is
crying fowl about the system. Maybe
he has something to slur the
image of the present Governor of RBI.

REPLY

Ashok m Rane

In Reply to S Santhanam 1 year ago

Every man is having a right to change when he knows his mistake. Instead of criticizing Dr. Chakraborthy, I welcome the stand taken by him. Let him help the country in stopping such a loot.

Shankar ganesh

In Reply to S Santhanam 1 year ago

well said

Sunil Rebello

1 year ago

The Great sugar mills Loans write off (LOOT) to benefit the sugar barons (BIG FAT CATS - politicians) who are only benefited.
we in the CHS system will foot the bill of the Co-op banks LOSS (loot).
The committee - if appointed will be the stooges of the politicians and they will require special knowledge, experience and the courage to speak out, no matter whose interests are hurt - the committee comprising people with knowledge, experience and the courage to speak out, no matter whose interests are hurt.
Hope our LORD / GOD will give give them their needs and peace of mind.

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