Why the Supreme Court is the right institution to reverse the trend of escalating bad loans and what it can do
On 17th February, the Supreme Court of India (SC) sent a ripple of hope that it will step into stop the ongoing loot of public sector banks (PSBs) by the nexus of corporates, bankers, politicians and ineffective regulators. A bench of the SC, headed by chief justice TS Thakur, has asked the Reserve Bank of India (RBI) to submit information on all defaulters who owe over Rs500 crore to banks. The Court took note of media headlines about the staggering loan write-off by 27 PSBs (Rs1.14 lakh crore between 2012 and 2015, compared to Rs2.11 lakh crore in the 10-year period 2004-2015) and a 53% increase in write-off in the past fiscal alone. The RBI governor himself has said that bad loans of PSBs will reach Rs3,15,000 crore by March 2016.
Some have questioned what they call the SC’s judicial overreach and whether it would make any difference. After all, the lower judiciary, right up to high courts, has often allied with the wealthy, wilful defaulters, allowing them to exploit judicial delays or their lack of a core understanding of banking, to thwart recovery of bad loans. We think, it will be different this time, because it is now clear that all actions and exhortations by RBI and the government have not merely failed, but also increased the extent of bad loans in the system.
The country, as a whole, pays the price for the super-wealthy. In the past two years alone, the government has injected over Rs59,000 crore for recapitalising PSBs, which is higher than the entire budget of several ministries involved in public welfare. Yet, while PSBs’ profits plummeted as soon as proper recognition of bad and stressed loans was insisted upon, bank chairmen were spending time lobbying for re-capitalisation funds rather than recovering bad loans.
The SC is bound to note that the bad loan problem is largely that of PSBs and not private banks. RBI’s data reveals that stressed assets of private banks (6.7%) are less than half that of PSBs, which stood at 14% of total outstanding loans. The better-run banks, like HDFC Bank and IndusInd Bank, have bad debts of around 1% of total loans. This indicates poor lending practices in PSBs, fraud or collusion by employees and political interference in decision-making. The Rs6,000-crore illegal forex transfer scam unearthed at Bank of Baroda, and detected at several other banks as well, is another example of such lax systems. Before panning the SC’s move, let’s look at the remedial measures that have failed.
Corporate Debt Restructuring (CDR): This was considered a one-time opportunity for power, steel and mega infrastructure projects to clean up their act. Not only did CDR fail as a concept, but multiple CDRs allowed within two or three years also failed repeatedly. The failure rate is so high that CDRs of 121 companies, with borrowings of over Rs30,000 crore, have failed in the past four years, despite loan-waivers, moratorium on payment and reduction in interest. The total amount involved in unsuccessful CDRs is in excess of Rs50,000 crore.
Flexible Structuring Scheme-5/25: Under governor Raghuram Rajan’s watch, RBI introduced an even more generous, 5/25 Scheme, allowing large borrowers to get a five-year moratorium on repayments and lengthening the loan tenure to 25 years. Among the first to grab this opportunity was a private, unlisted company of Mukesh Ambani. Again, the generosity to borrowers mainly comes from PSBs. While the failure of this Scheme will be evident only far into the future, the very fact that extremely controversial companies have been allowed to avail the Scheme indicates that PSBs cannot be trusted to implement it in the right spirit and RBI has failed badly in its supervision. It is only the SC that can, correctly, pull up RBI for its failed supervision over the decades.
CBI Cell: In May 2015, the finance ministry came up with another cosmetic action: allowing defaults of over Rs50 crore to be investigated by a special cell of the Central Bureau of Investigation (CBI) for potential fraud. So far as we know, investigation into even the most notorious cases of fraud, such as Winsome Diamonds (formerly Suraj Diamonds) and Shree Ganesh Jewellery, which systematically conned multiple banks, has not yielded any results. Investigation without time-bound results (in the form of recovery of assets, not arrests) is meaningless.
Central Fraud Registry: On 21st January this year, RBI introduced a central fraud registry, a searchable database of frauds below Rs5 crore, that will allow information about fraudulent activity to be shared between lenders. Frauds above Rs5 crore will be reported to RBI’s central fraud monitoring cell (CFMC) under its supervision. That such a registry is being created only now, and probably as a counter to the CBI cell, ought to be a matter of national outrage. For over a decade now, individual defaulters are thrown out of the credit system, but bankers, who form a consortium for large lending decisions, have not felt the need to share data on fraudulent companies and their directors. Doesn’t this smack of gross regulatory failure?
Why the SC Must Act
The functioning of nationalised banks today is completely contrary to the basic objectives of bank nationalisation. Instead of equity, and even access to banking services and credit, we have a lopsided system that seems to work only for crony capitalists. As the RBI governor himself pointed out, the biggest defaulters no longer feel embarrassed about flaunting wealth at obscenely lavish birthdays, mega weddings and parties the cost of which is often over Rs100 crore.
In contrast, banks are extremely hard on every kind of small borrower. Farmer suicides are a blot on the nation, because debt-ridden farmers, dependent on the vagaries of the monsoon and fluctuating prices, get little sympathy from lenders. In fact, bank unions are now demanding a 5/25-like scheme for restructuring of loans to farmers. Small and medium enterprises also face the brunt of ruthless recovery as well as capricious release of already sanctioned funds. Since all these loans are extended with collateral that is far in excess of the loan as well as personal guarantees, many an entrepreneur has ended up losing his/her lifetime savings and assets even when an enterprise faces the normal ups and downs of business cycles. Most of them do not even have the funds to fight back. In fact, senior central bankers readily admit that the system is extremely unfair to small borrowers.
Finally, issues with bank credit have assumed such dangerous proportions that bank unions, who normally agitate about their own pay and perks, are now focused on bad loans and accountability of senior management. The Indian National Bank Employees Federation (INBEF) will hold a dharna at Jantar Mantar to draw attention to the issue. Union leader Subhash Sawant is fighting a long legal battle demanding rules to make PSB chairmen, managing directors, CEOs and executive directors accountable in case of gross abuse of power to grant undeserving loans. Few know that scrutiny by the central vigilance commission does not apply to them and even in the most egregious cases of abuse of power, these officials are let off with a letter of censure or simply allowed to resign and exit. The All India Bank of Maharashtra Employees Federation has got its members involved in ‘mission recovery’ to nudge borrowers to repay. Unfortunately, this is restricted to small borrowers.
What the SC Can Do
First, set up a Court-monitored committee with an extremely short timeframe to identify the top defaulters of all banks and identify their tricks to delay recovery action, including court cases under multiple statutes in various courts of India. It should club them and have the committee suggest a single plan of recovery. Secondly, for a more long-term solution, order a time-bound implementation of the PJ Nayak committee report. This report, submitted in the month the National Democratic Alliance came to power, has a clear road map for cleaning up India’s banking system.
As likes of Jaitley's/Ravi Shankar Prasad/Jawdekar/Chidambaram/Manish Tiwari/Kapil Sibal/Ashwini Kumar all Lawyers ex Ministers are have Excellence beyond par to catch the systemic failures.
Hope we donot witness 2007 like meltdown followed by violence/anarchy & arson where poor takes on the system.
Amen.Let's get Bankrupcy laws.Remove unwanted/unforceable laws/define time limits in court cases.
We are proud 76 position by Transparency International.
Mahesh
Sad and agonising part is that these Public Sector Banks BOB, SBI, Dena, IDBI,UCO etc have lend to corporates who on paper were risky like Real estate sector, Hospitality etc without doing any checks and simply by looking elsewhere.Not only that they have willingly re-entered into CDRs with these wilful defaulters .It is sheer malpractice , corruption from the top management and all this with publics hard earned money who thinks his money is being well managed by well paid PSB employees .Today a PSB employee retires with min Rs 50 lakhs and a pension starting at min Rs 35000/mth...All this with common mans money who does not get any compensation if the bank sinks...
I agree that we cannot go to the SC for each and every failure of govt. But what if there is malfeasance? Will the govt ever file a judicial case against itself because it has knowingly committed white collar crimes? Remember that kicking the rascals out is no solution as a new set of rascals replaces the ones that have just vacated the seat of power.
Perhaps shaming may work. Why not have our army of lumpen, which is at the beck and call of every pol, hold daily demonstrations in front of the corporate houses and homes of pols and bankers?
Even better, why not have a digital shaming tsunami launched against the near and dear ones of these brazen wrong doers? It seems to have worked in the Chinese mainland. It might work here too.
People are getting fed up. For every Subrata Roy spending months behind bars we have more cons like Mallya who flaunt their ill gotten wealth without facing even a day in prison.
The NPA problem cannot be solved by the govt, SC or by the bankruptcy code. What is needed is (1) privatization of all PSBs and (2) change in RBI norms for asset classification from 90 day overdue to judgmental, which is the international norm. Once losses are recognized in time and doctoring of books by pushing the 90 day deadline cannot be achieved, there would be a discussion with a borrower on equal terms. Today, a borrower knows that a bank will bend backwards to give lower rate, longer tenor, waiver of security, waiver of interest and more... but he has to make sure the bank doesn't reach the 90 day mark. Most borrowers don't come to the negotiating table till the 80th day and then suddenly ask for the moon and strike a "sweet" deal before the 90th day. This balance of power has to go and the bank has to be pressurized to write off what is not recoverable. Imagine the banking system still calls the Enron power project a "standard asset" under a series of restructures of the project for 15 years now. It is a case study on imaginative power of the banking system of how to fudge books of accounts.
Pity, even CAG's post-facto reports castigating the Govt (union or States) is often overlooked by the Public Accounts Committee of the Parliament, which is supposed to act as a check against misuse of public funds by the Govt.
CAG's function as stated in Constitution of India, Part V, THE UNION, Chapter V CAG, Articles 148 to 151.In these four articles, nothing special as to strict accounting of the spending by States and the Union is stated.
In my opinion, these should be a schedule for the duties of CAG. So long as Govts are not accountable to CAG, all politicians will not be accountable for their over spending for their vote bank.
If the Apex Court is able to have its say in improving the recovery of loans from big wilful defaulters, that will send a strong message down the line. Having said that, the Indian banking sector is not in as bad a shape as is being made out by some analysts and external agencies. Major Indian commercial banks including SBI have been able to meet all statutory requirements. Unlike their corporate co-travellers, banks are meeting their payment obligations on due dates and in the recent past there have been no bank failures in the commercial banking sector in India. Part of credit for this should go to the vigilant regulator. This is not to argue that all is well as regards functioning of commercial banks.
There is immediate need to restore the health of the banking system impaired mainly by reluctance of big borrowers to make timely repayment and heavy burden on public sector banks (PSBs) arising from workload and drain on resources in performance of social responsibilities.
There is no point in arguing now that the overhaul and professionalization of public sector banks (PSBs) should have happened along with bank nationalisation and there should have been regular ‘health checks’ and ongoing corrections. Just as a ‘health check-up’ does not change the condition of a person, the re-classification of more loans as NPAs does not alter a bank’s ability to change. The need of the hour is to support banks to recover their dues from borrowers who have the capacity to repay, infuse professionalism in the banks’ working and restore the faith in the banking system.
As private sector banks have failed to perform their responsibilities and are not too willing to grow (their share in banking business is less than 30 per cent), privatising the existing public sector banks is no solution. Failure of several banks in the private sector, including the Global Trust Bank, is fresh in our memory. Perhaps, time is opportune to reverse the thinking and for the government to consider nationalising entire banking business outside cooperative sector and restructuring the commercial banking system to serve public interest.