AIBEA blows the whistle on bad loans of Indian banks

Bank union, AIBEA, demands that banks recover bad loans from wilful defaulters

Trade unions are usually quick to announce protests to demand higher wages or better working conditions. This time, however, the All India Bank Employees Union (AIBEA), one of the biggest employees unions in India, has decided to turn into a powerful whistleblower. On 5th December, AIBEA gave a call to ‘stop the loot of public funds’ and start recovery of bad loans. This is a welcome development. I have always held that the destruction of giant entities, such as Air India, Unit Trust of India, and giant public sector entities in telecom and engineering, is as much due to employee apathy as it is due to the loot by politicians and bureaucrats. AIBEA has signalled that it will name and shame defaulters, if necessary, to force banks to start acting tough and recover bad loans. The Reserve Bank of India (RBI), as the banking regulator, is fully aware of what is going on; but now, the unions are asking it to move from rhetoric to action. The AIBEA cites the overused quote about India having sick industries but no sick industrialists. It also quotes RBI governor, Dr Raghuram Rajan, who recently told banks, “You can put lipstick on a pig but it doesn’t become a princess. So dressing up a loan and showing it as restructured and not provisioning for it when it stops paying, is an issue. Anything which postpones a problem (rather) than recognising it, is to be avoided.” AIBEA points out that the top four bad loan accounts add up to a massive Rs22,666 crore, which include Kingfisher Airlines and Winsome Diamond and Jewellery Co. Will RBI stop the “systematic loot of public money” by recognising these as pigs with lipstick?

The data collated and released by the AIBEA is a frightening indictment of the banking regulator and the finance ministry. While the government has been boasting about India having escaped the global financial crisis, how does it explain the four-fold increase in bad loans—from Rs39,000 crore in 2008 to Rs164,000 crore today? The creation of new bad loans is a mind-boggling Rs495,000 crore, according to AIBEA.  And, corporate debt restructuring through provisioning, concessions, waivers, write-offs, concessions, one-time settlements (which are done multiple times), compromise proposals, etc, add up to a massive Rs325,000 crore.  

Write-offs of bad loans by PSU banks in the past seven years amount to a massive Rs140,000 crore. If we include the bad loans of private banks and foreign banks and other financial institutions, the total bad loans are more than Rs2,50,000 crore, says the AIBEA statement. Worryingly, it says, things have reached a point where management is making banks vulnerable by reducing the provisioning of bad loans. RBI has pointed out, and is aware, that the provision coverage ratio of India’s banking system has dropped from 55% to 45% as against a global average ratio of 70% to 80%.

AIBEA’s demand will resonate with depositors who are being asked to pay higher charges for every service, to ensure higher profits for banks every quarter. AIBEA, for once, is on the same side as two big stakeholders of banks—bank customers and shareholders. Clearly, the call to publish the names of defaulters, to make wilful default a criminal offence, investigate collusion between banks and borrowers and the demand not to ‘incentivise corporate delinquency’, will find huge support among ordinary people.

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    COMMENTS

    Yerram Raju Behara

    5 years ago

    The point of inflexion is 1993 when liberalization and globalization had set in. The banks clamoured for legal protection and SAFRAESI Act came into being to securitize assets. This provided opportunity for banks to do armchair lending. Corporate lending, Infrastructure lending, lending to PSUs under government pressure, Housing Loans, Retail loan segment other than Agriculture and Micro and Small Enterprises fall under such category. The priority sector lending was blamed for rising NPAs and in particular agriculture and MSMEs as they are now called, in the name of behest lending. Today out of the NPAs in MSMEs, it is Medium enterprises that took a greater slice. It is good that AIBEA has taken up the cause obviously under fear of their own existence. There are workmen directors on Boards. And they are representatives of AIBEA. Being silent on Boards to get waivers or reduction in punishments of their highly delinquent members whose cases come to Board scrutiny, they have not contributed to raising concern on loan delinquencies. Seeing this articulation, I only hope they now take courage to raise the same concern and remedy the situation. The remedy lies in proper due diligence and stopping express and super express sanctions and the home loan and car loan melas. This must be mandated by the regulator without any delay. Loans can't be sanctioned in 24 and 48 hours save guarantees or LCs of the existing good loan accounts or adequately collateralized ones. Regulators have to come clean on these issues and the responsibilities of the nominee directors.

    Gopalakrishnan T V

    5 years ago

    This loot through banks by Corporates and others has been a regular feature and it gets ignored because banks are able to write off of the loans out of profits and they are also able to get capital support fropm the Government.The write offs seldom get scrutinised. On the contrary , influence worksa lot to get the loans written off.Board of Directors who include RBI and Government nominees have no time to seriuosly go through the Agenda items and most of the items cleared as a matter of routine. These agenda include loan proposals and write offs. The auditors of banks seldom make any comment or dissent and there is always a trade of between auditors and the Board of Directors. The banks balance Sheets are drawn as desired by the Chairman and by the influential Board members.It has nothing to do with the ground realities. Chairmen of banks are entitled to draw bonuses based on performance and the performance indicators are window dressed heavily so that they are able to draw a lumsum money on an yera to year basis. Employees representatives are also on the board and they seldom raise any dissent or they are not heard adequately on tyhe Board agenda. The Chamber of Commerce and other representative bodies who always fight for concessions and reliefs are never heard fighting to reduce the bad loans and are never found disciplining the borrowers.Thee only way to reduce the formation of bad oans is to have a self correcting mechanism by which right from the day of sanctioning of loans
    the borrowers need to be disciplined by a rating method based on their conduct of acounts. Banks also need to be brought under discipline and should be penalised if they are observed to be lax in the proper conduct of loans. Banks need tight regulation as they deal with money and hunman resources and it is humanly impossible to prevent greed and commitment of irregularities. Banks need a strict vigilance on an ongoing basis as they deal with depositors hard earned money. Tax payers also should object supporting banks for their failures by using Govt resources

    t k mitra

    5 years ago

    The move made by AIBEA is timely and needed urgently to save the nation from disaster.It is well known that in our country industries/enterprises become sick whereas the owner/entrepreneuers are generating/getting fat.Loan appraisalsystem,inspection,project monitoring etc. are far from fullproof which fails to protect the financial institutions,there are rampant corruption,political interference,tardy judicial redressal etc.

    nagesh kini

    6 years ago

    Now that the Division Bench of the Bombay High Court in DJ Exim vs. SBI, has cleared the 'naming and shaming' exercise of the publishing of the photographs serves the purpose of creating awareness and cautioning prospective clients, it should be the very first move in dealing with wilful defaulters even before going into CDR that results in and calls for major sacrifices for the banks and more benefits for borrowers.

    kubera

    6 years ago

    It would be interesting to watch if AIBEA actually publishes the names of defaulters, or if they would be silenced, like many other whistle blowers. Are there not workers' representatives in the Banks' Boards? Why are they not raising the issues there or in the shareholders' AGMs?

    deepaksb

    6 years ago

    Bank employess themselves are responsible for bad loans.

    Bank Employees/managers/directors -hand in gloves with known defaulter borrowers ( in consideration of cash/kind/kickbacks) IS WELL KNOWN IN FINANCIAL CIRCLES.

    Its high time to bring such bank employees to BOOK to eradicate a portin of large NPAs of all Public sector and private sector banks and financial institutions.

    Panchapakesan S

    6 years ago

    Restructuring of Corporate loan accounts is nothing but a gimmick to show a bad loan as a standard asset. RBI and Govt.of India should take concrete steps to curtail bad corporate loan accounts and stop forthwith restructuring of big corporate loan accounts

    Gopalakrishnan T V

    6 years ago

    AIBEA can strongly recommend for introduction of some self Corrective mechanism to discipline both banks and bad borrowers. The amounts written off by banks as bad loans can be shared among employees and other stakeholders if the banks show some guts to discipline the borrowers. The need to prevent formation of Non Performing Assets in banks in the interests of all stakeholders of banks who include depositors, good borrowers and shareholders is the need of the hour and is long over due. The responsibility for recognition, resolution and recovery of bad assets is basically with the bankers and the borrowers and they cannot be casual and careless in their dealings.The banks can educate and discipline the borrowers on an ongoing basis and the borrowers can be rewarded or punished if they deviate from bank's disciplinary requirements and attempt to hoodwink the banks with their erratic behaviour and conduct of accounts leading to formation of non performing loans.. The erring borrowers can be identified easily by banks and they can be brought under proper discipline by making them to pay a penalty based on their irregular conduct of accounts and deviation from the discipline envisaged. These penalties over a period would be adequate to cover up the losses on account of bad assets. The provisions now made towards bad assets can be minimised and the money saved on provisions can be passed on to the depositors and other stake holders. The write off of loans presently resorted to by banks at the cost of tax payers' and the depositors' money can also be considerably brought down.The basic approach of the bankers is to discipline themselves in the selection of borrowers, grant of loans, coverage of securities, monitoring and supervision of loans,etc and enforce discipline on borrowers in a constructive manner. Borrowers are partners in business and their healthy growth should reflect in banks balance sheets. Likewise, their deterioration in health should not affect banks balance sheets and other stakeholders. Unless and until a built in mechanism is in place, there cannot be an effective control on the defaulting borrowers.Earlier the action,the better for banks, borrowers, and other stakeholders of banks and the economy. RBI being a regulator of banks and being the monetary authority of the economy cannot and should not tolerate unhealthy balance sheets of banks, large corporates and the economy. Bad assets do not contribute to the economy is a fact which cannot be allowed to continue for ever.It affects the economy badly and all its stakeholders.SEBI has also a major responsibility to ensure that by any reckoning defaulting companies should not get listed in the Stock Exchanges and they should never be allowed to raise capital through IPOs.The Corporates should have an excellent ratings from banks and these ratings should reflect on the conduct of loan accounts.These ratings should be made transparent by banks and should be available for all having dealings with the Corporates.Will the RBI and the Government show the guts to discipline both banks and borrowers to ensure that the loans turn productive in the larger interests of the economy, the financial system, and all its stakeholders.

    Bhaskar

    6 years ago

    Great that the unions are waking up to this loot. It is wrong and incorrect to say that this loot is of recent origin. The composition of BoD and their selection is the cause of such rising badloans. Directors and Chairmans of PSB are least bothered to do their jobs. They are very aggressive in punishing the lesser mortals in the bank but hardly display such activism in evaluating their faults which are enormous ie the NPAs. The BoD have perfected the system to such an extent that it is impossible to fix responsibility on them and or the Statutory auditors of the Bank. look at the power sector and the coal scam one can understand the magnitude of their incompetence and or corrupt practices. The governance structure in PSBS are a sham and authority without responsibility at the top just does not work. It is these banks which bring a bad name to capitalism and encouraging the left in this country to clamour for increase government control of banks. Surely not the remedy to set right this situation. Act fast else banks will go the Air India way

    REPLY

    nagesh kini

    In Reply to Bhaskar 6 years ago

    Extremely well said.
    It is in deed a sad fact. Then Law Minister Ashwin Bansal's CA was 'elected' shareholders' Director of a PSU!

    Lending to MSMEs by banks: Some bitter truths

    MSMEs being the backbone of economy have been in need of funds to grow themselves but banks have adopted an approach which has failed to meet their needs

    When it comes to lending for business activities, banks tend to prefer large business entities to small players. This bias comes from the fact that big businesses have better assets and the possibility of failure of these businesses is less compared to small business enterprises. In order to gauge this preference of banks conversations with a small business enterprise, often referred to as micro, small and medium enterprises (MSMEs) says it all. For a micro and small business, to get loan from a bank is nightmare. This has been happening in spite of dedicated MSME branches set up by various banks and MSME lending being a part of priority sector lending.
     

    RBI data in this regard is an eye opener. More than 92% MSMEs run their business on self-finance and have no source of institutional finance. The chart below shows that:
     


    It is obvious that small businesses require funds as they have limited source of self-financed capital. Idea of schemes such as Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) came from this but somehow could not acquire acceptance from the banks in general. Though loans were given under CGTMSE, the number has been very insignificant compared to the size and scale of MSME business operations.

    But this is not all.

     

    There has been always a demand and supply gap in lending to MSMEs. MSMEs being the backbone of economy have been in need of funds to grow themselves but banks have adopted an approach which has failed to meet their needs. The chart below shows the demand supply gap which seems to be narrowing in days to come but still very sizeable by any stretch of imagination:
     


    What is extremely surprising is that MSMEs don’t perform badly compared to the big business houses when it comes to performance on the payment of loans. The data available in this regard shows that percentage of impaired assets have been rising for medium and large business while it has been relatively stable for micro and small business.
     


    So, there is no apparent reason for banks to show preference for large businesses as their performance on impaired asset front has been growing bad to worse. What is it that is preventing banks from lending to MSMEs? Most apparent reason is that banks to play safe and don’t want to add to their non performing assets (NPAs). The unfounded fear comes again from the fact that small business will default. But this logic gets weakened in some cases. Even in cases when credit guarantee is available through CGTMSE, banks are wary of funding of MSMEs because of the fact they don’t want any hassle in claiming guarantee benefit in event of a default by a micro or small enterprise.
     

    Recently, while delivering a keynote address at the Training Workshop on Credit Scoring Model with support from IFC for MSE Lending in Mumbai on 29th November, Dr KC Chakrabarty, deputy governor, Reserve Bank of India (RBI) said that credit scoring model will go a long way in promoting credit facility to MSMEs. But the key question is can lack of will to fund MSMEs will addressed by a strong statistical model. There is a need to fix accountability for lack of funding of MSME business by banks. For instance every bank can be asked to offer collateral free lending first to MSMEs under CGTMSE before the bank asks for security for any lending.
     

    Last but not the least, let MSMEs also understand their responsibility towards lending done by banks. They must act with full responsibility to ensure that loans are paid on time on them and wilful default does not become order of the day.
     

    (Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)

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    COMMENTS

    Jerin Chacko

    6 years ago

    Forget collateral for loans, Banks insist on collateral even for issuing a Bank Guarantee to the average firm!

    nagesh kini

    6 years ago

    Vivek is bang on!
    The repayment record of the Tiny and SME sectors are far better as the borrowers are more particular about their reputation and credibility issues that the big ticket willful defaulters give a go bye and the MOF/RBI choose to conveniently overlook.
    The banks drag the small borrowers to DRT/SAFRESI at the drop of the hat including locking up and attachments. Why nothing whatsoever for the top defaulters?
    I know of a genuine SME harassed by the Saraswat Coop. Bank by hyping up highly inflated unsubstantiated demands and the matter has been dragging on and on. The unit is among the 92% self financed now!

    REPLY

    Srinivas

    In Reply to nagesh kini 6 years ago

    I agree - the SARFAESI act was one of the first nails in the SME coffins.

    Srinivas

    6 years ago

    In spite of the CGTMSE scheme which underwrites all loans to the SME sector, banks insist on collateral for all loans. So that makes a mockery of the scheme, the bank charges you for providing you a loan under that scheme, takes collateral from you, and actually can show the entire loan as doubly secured - one with your collateral and one because GOI has underwritten it under the scheme !

    Sad but this is the truth - as is the case with the USA and other economies, the banks are playing a significant role in ensuring that this sector which provides maximum employment due to their semi-skilled nature will die out.

    Identifying banks ‘too big to fail’: The RBI way

    RBI's approach on too big to fail gives more weightage to factors such as securities issued and bought by banks in India and overlooking risky assets and growing NPAs of the lenders

    The financial crisis that hit the world economy at the beginning of the year 2008 was an eye opener. It showed how fragile the entire financial system was and how systemic risks arising from weakness of financial institutions could easily spill over to the real sector. The crisis also highlighted the need to have a re-look at the financial institutions and monitor risks posed by these financial institutions. Many large financial institutions, which looked infallible before financial crises, failed during the crisis giving rise to the fear that such financial institutions require closer monitoring and could pose serious systemic threat in future. With the crisis in the background, the concept of, “too big to fail” gained significance. Though the term, “too big to fail” was used in earlier crises as well, it assumed significance post-2008 crisis. Federal Reserve Chair Ben Bernanke defined the term in 2010: "A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.”
     

    Basel Committee on “too big to fail”:  Post financial crisis of 2008, the Basel Committee on Banking Supervision (BCBS), adopted a series of reforms to improve the resilience of banks and banking systems. In order to ensure that banking system has enough resilience, the committee started working on two key areas which included assessment methodology for globally systemically important bank and how these banks can develop additional loss absorption capacity.
     

    BCSB came out with an indicator-based approach to identify systemically important banks. The selected indicators are chosen to reflect the different aspects of what generates negative externalities and makes a bank critical for the stability of the financial system. The advantage of the multiple indicator-based measurement approach is that it encompasses many dimensions of systemic importance, is relatively simple, and is more robust than currently available model-based measurement approaches and methodologies that only rely on a small set of indicators. The selected indicators reflect the size of banks, their inter-connectedness, the lack of readily available substitutes for the services they provide, their global (cross-jurisdictional) activity and their complexity.
     

    As per Basel Committee’s indicator based measurement approach, 20% equal weightage has been given to five critical factors which are cross-jurisdictional activities, size, interconnectedness, substitutability and complexity which is explained in the chart below:
     

    Source:Basel
     

    For each bank, the score for a particular indicator is calculated by dividing the individual bank amount by the aggregate amount summed across all banks in the sample for a given indicator.The score is then weighted by the indicator weighting within each category. Then, all the weighted scores are added. For example, the size indicator for a bank that accounts for 10% of the sample aggregate size variable will contribute 0.10 to the total score for the bank (as each of the five categories is normalised to a score of one). Similarly, a bank that accounts for 10% of aggregate cross-jurisdictional claims would receive a score of 0.05. Summing the scores for the 12 indicators gives the total score for the bank. The maximum possible total score (ie if there were only one bank in the world) is 5.
     

    Additionally in order to find out this category of bank, BASEL approach says that banks need to be identified from list of 75 largest banks based on leverage ratio prescribed by Basel. Banks can be added in this list depending upon descretion used by national supervisor.
     

    RBI approach on “too big to fail”: Based on the Basel approach, the Reserve Bank of India (RBI) has also decided to identify banks which are domestic systematically important. The RBI draft document says, “The banks will be selected for computation of systemic importance based on the analysis of their size (based on Basel III Leverage Ratio Exposure Measure) as a percentage of GDP. The banks having size as a percentage of GDP beyond, 2% will be selected in the sample of banks. As foreign banks in India have smaller balance sheet size, none of them would automatically get selected in the sample. However foreign banks are quite active in the derivatives market and so the specialised services provided by these banks might not be easily substituted by domestic banks. It is therefore appropriate to include a few large foreign banks also in the sample of banks to compute the systemic importance. The total assets of the banks selected for the sample would constitute 100% of the GDP. For this purpose, latest GDP figure released by Central Statistical Office, Government of India will be used”.
     

    The broad comparison between RBI and Basel approach is given in the table below.
     

    Source: RBI
     

    While cross-jurisdictional activity is considered as a key factor for determining the risks posed by globally systemically important banks, for domestic banks size has been given a higher weightage by RBI. Cross jurisdictional activity has been given a weightage by RBI in sub-indicators and it has replaced level 3 assets by cross jurisdictional factors. RBI prescribes additional capital requirements for too big to fail to banks as follows:


    Source: RBI
     

    Apparently RBI’s approach on too big to fail gives more weightage to factors such as trading books of the banks in India. Under all three heads of interconnectedness, substitutability and complexity, the focus is more on market securities which include securities issued by the banks as well as securities which banks have purchased. The key aspect of core banking business is not explicitly mentioned. Banks in India in the current scenario face threat from rising non performing assets which pose threat to the banking operations. Risky assets in the books of most of the banks such as exposure to real estate sector or lending to various corporate also pose threat to the banking industry. The quality of assets of a bank should definitely be a key criteria in identifying too big to fail status. Also, with banks in India spreading wings across world, cross-jurisdictional liability should have been given a higher weightage.

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    COMMENTS

    Dayananda Kamath k

    6 years ago

    all of them have already failed and have become big to be managed prudently.so it might be priortising whome to be saved. the new bankin licences is necesitated because the existing banks can not be resurrected due to mis managemnt by regulator, finance ministry.

    MG Warrier

    6 years ago

    The introductory paragraph of the December 2, 2013 RBI release on the subject reads asunder:
    “A few banks assume systemic importance due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness. The disorderly failure of these banks has the propensity to cause significant disruption to the essential services provided by the banking system, and in turn, to the overall economic activity. These banks are considered Systemically Important Banks (SIBs) as their continued functioning is critical for the uninterrupted availability of essential banking services to the real economy.”
    The cut and paste approach to policy formulation which impaired the finance ministry’s policy apparatus is, perhaps slowly, affecting the RBI also. The entire approach has been borrowed from the ‘international’ context. Failure of insitutons, big or small, affect the stakeholders. Remember the famous conclusion of All India Rural Credit Survey Committee of the 1950’s: “Cooperation has failed. But cooperation must succeed”
    The sporadic releases of policy approaches on banking policy in different context send out blurred signals which get interpreted by stakeholders based on their constituency interests. The central bank should, on its own, take up a serious study of the structural and policy issues affecting the financial sector.

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