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.