Bad Loans Increase Even as RBI Talks Tough
Unless RBI keeps a hawk-like eye on how the loans are restructured well-meaning efforts could turn controversial
“Our simple message is if there is a problem, recognise it and address it quickly. Don’t pretend and extend.” This is what SS Mundra, deputy governor of the Reserve Bank of India (RBI), told industrialists on 23rd September when he asked them to clean up their bad loans very quickly. 
Mr Mundra also expressed concern at how corporate leverage had increased substantially in the past few years. Yes, it is something that is worrying everybody—bank officers, bank unions, investors and ordinary taxpayers who watch helplessly as the Central government recapitalises banks with sickening regularity, rewarding them for their inability to rein in bad loans or making big industry repay their debts. In fact, crony capitalists and their friends in government have ensured that the banking system is designed to let off bank chairpersons who extend dubious loans to industry. Even in the most egregious cases, they get away with a ‘letter of displeasure’ or are allowed early retirement. 

In August 2014, the All India Bank Employees Association (AIBEA), in a press release, had pointed out that ordinary bank employees face harsh punitive action like dismissal because “there are defined rules to take action against them for any alleged misconduct. But in the case of Executive Directors and CMDs, there are no clear rules under which action can be taken against them”. 
CH Venkatachalam, general secretary of the AIBEA, called on the government to frame rules and conduct regulations for executive directors and chairpersons of banks. Strangely enough, despite the separation in the role of chairman and managing director in a few public sector banks, there is no move to increase accountability or pin responsibility of where the buck stops, which is at the very top. 
The AIBEA, which had put out a detailed note titled “Loot of Public Money” due to ‘bulging bad loans’ has gone quiet about the massive ever-greening of loans in the past year. In March 2014, it had alleged that bad loans of banks had shot up from Rs39,000 crore at end March 2008 to Rs1,64,461 crore at the end of 2013 while amounts written off in that five-year period were a massive Rs1,18,010 crore. It further said that the incidence of wilful default was increasing and the defaulters were people in high positions—one was connected with a Central minister, two loan defaulters were Padma Shri awardees and one top defaulter who owed Rs6,000 crore to banks was a Rajya Sabha member. The last was clearly a reference to Vijay Mallya. 
Although bank unions are silent, many business houses as well as senior bankers are informally expressing shock at the speed with which bankers are offering long-term restructuring of loans under RBI’s 5:25 scheme launched last year. What is the 5:25 scheme? On 15 July 2014, RBI issued a circular entitled “Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries”. The idea was laudable. To paraphrase the circular, it said that banks had been lobbying RBI on behalf of borrowers, that they were unable to extend long-tenor loans (25-30 years) for infrastructure projects with long maturities. Instead, they restricted finance to 12 to 15 years to overcome an asset-liability mismatch. In effect, RBI allowed banks to extend the loans extended to infrastructure projects and core industry sectors to 25 years with periodic refinancing every five to seven years. RBI also spelt out some checks & balances; but when the circular itself is being diluted, it remains to be seen whether bankers treat this as anything but an officially sanctioned ever-greening window. 

Taking Advantage

For starters, the circular said that the 5:25 scheme would be offered only to new projects of over Rs1,000 crore. But, by December 2014, it was extended to existing projects as well. Media reports suggest that a slew of large infrastructure companies with payment difficulties had immediately lined up to take advantage of the restructuring option. Newspapers have reported restructuring of the controversial Bhushan Steel (outstanding debt of Rs35,000 crore), GMR Infrastructure (consolidated loans of over Rs42,000 crore), Jaypee Infratech (combined debt of Rs57,000 crore in three infrastructure projects). Business Standard reported that Reliance Gas Transportation Infrastructure Ltd—an unlisted company owned by Mukesh Ambani—has got its loan restructured and the tenor extended to 2030-31. This is probably the first restructuring by the Mukesh Ambani group and the first under the RBI’s 5:25 scheme. The company, which owns and operates the 1,386-km gas pipeline connecting Andhra and Gujarat is making losses and had a total debt of Rs16,010 crore as of 2014-15.
Don’t Dr Raghuram Rajan’s eloquent and frequent criticism of banks for covering up bad loans, as well as Mr Mundra’s recent criticism, seem at odds with what appears to be happening in the restructuring process at banks? The media has little information on how the loans are being restructured and, hence, the information is published is usually without comment. So far, only Vivek Kaul, writing for The Daily Reckoning Newsletter (on 11th September) has called out the 5:25 scheme for what it really is: The Great Indian Banking Ponzi Scheme! 
Mr Kaul says that RBI's stressed advances.” Financial Stability Report released in June earlier this year pointed out: “Five sub-sectors, namely, mining, iron & steel, textiles, infrastructure and aviation, which together constituted 24.8% of the total advances of scheduled commercial banks but accounted for 51% of its total stressed advances”. Within the infrastructure block, the power sector is a big defaulter. Mr Kaul’s number-crunching shows that instead of the logical expectation that “banks would go slow on lending to sectors that have been defaulting on their loans,” what is happening is just the opposite.
Let me quote from Mr Kaul’s analysis. He says, “Bank lending to the infrastructure sector between July 2014 and July 2015 grew by Rs71,600 crore. Within the infrastructure sector lending to the power sector grew by Rs59,400 crore. Lending to the iron and steel sector grew by Rs27,100 crore during the course of the year. Loans to the iron and steel sector form around 4.5% of the total loans and 10.2% of the total stressed advances. What does this tell us? In the last one year, banks gave Rs98,700 crore of the Rs1,20,900 crore that they lent to industry to the two most troubled sectors of infrastructure and iron and steel. This means that 81.6% of all industrial lending carried out by banks in the last one year went to the two most troubled sectors of infrastructure and iron and steel.” And this, as he points out, happened after RBI had red-flagged these sectors!
The rating agency CARE, in its analysis, has warned that “if the scheme (5:25) is not implemented in its true spirit and without appropriate monitoring mechanism, in terms of wilful diversion of funds by the promoters, it could potentially paralyse the critical sectors of the Indian economy.” It further warns that borrowers may misuse this scheme and divert funds to other projects “if they have excess cash accruals available in the initial phase of the project.” That has, indeed, been the history of how large industrial groups have misused loans from development finance institutions and public sector banks. Even corporate debt restructuring or CDR, which was introduced as a one-time exercise, has repeated this with impunity, right under under RBI’s nose. Dr Rajan’s, and the RBI’s, public stand on bad loans are commendable. But past experience suggest that, unless RBI keeps a hawk-like eye on how the loans are restructured a well-meaning scheme could turn controversial. 
(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected])
Sunil Krishnan
8 years ago
Just 11 more months for Dr. Raghuram Rajan's term to end. The industry, Banks and the Government who connive to keep the rotten wheel going at the cost of the taxpayer would be waiting to see his back. No one is really interested in fundamentally addressing critical challenges facing this country. Only God can save this country.
Dayananda Kamath k
8 years ago
It. Is best case of Indian jugad. The scheme was introduced with a view to avoid asset liability mismatch of commercial banks in financing long tenure infra projects. But is being used for ever greening of NPA. Just like debt relief introduced to recapitalise the banks which destroyed the robust banking structure of India.
8 years ago
If a small borrower or a SME client defaults on his loan for factors totally beyond his control banks rush to publish the borrower's photos in the newspaper with a threat to sell the security provided by them. When large borrowers default bankers go them with folded hands with a begging bowl. And of course, easiest would be to restructure the asset which everyone knows is never going to be repaid. Has a single large borrower been convicted for deliberate default or his personal properties attached for recovery. Both Government and RBI will keep talking about bad loans but eventually large borrowers will never pay and the loan will be ultimately be written off.
Dayananda Kamath k
8 years ago
A simple example corporation bank which was a small but strong bank which had the distinction of writing back excess provisioning when prudential norms were introduced in 1993as their provisioning norms more prudent did not find their able executives to be eligible for heading bigger banks. But when outsiders posted started promoting yes men than merit and weakened the bank to such an extent that suddenly in2004 onwards hoards of executives from this bank were heading big banks. They were rewarded for non performance. And today everybody knows where they have brought the nationalised banks headed by them. At least in case of 2 executives I complained to the CVc, RBI. Finance ministry. Prime minister and even president of India well in advance about their credentials. But they were fast tracked in promotion and every one knows where they have brought these banks. Who is responsible. They themselves
Dayananda Kamath k
Replied to Dayananda Kamath k comment 8 years ago
Today RBi has imposed restrictions on one of the banks for mismanagement of credit. Which is one I referred. The cmd ha retired and enjoying directorship in prestigious financial services company. Is it not the duty of regulator to book him and set an example to others. At least as penance for ignoring the warning given well in advance before his elevation.
Dayananda Kamath k
8 years ago
As long as regulator I'd not interested in probing and taking action against guilty and intersted in protecting wrong doers this situation will continue. When there is change of cmd suddenly there will be higher provisioning. As long as banking is directed towards statistically improving ratio this trend will continue. Both the cmd cant be right. Then why regulator and owner govt is silent spectator
Suketu Shah
8 years ago
No surprise.These are the kind of things which happen when you donot have the best economic brain in the country as Finance Minster-Dr Swamy.

End result to get the economy out of crisis is negligible since last 1.5 yrs.Also RBI is only a facilitator,main game changer has to come from bills being passed which i just not happening.
Gopalakrishnan T V
8 years ago
5:25 Scheme scheme is an officially permissible evergreening of long term advances which helps banks to sanction fresh loans and camouflage bad loans. In good old days, there was a system of scruitiny of large accounts by the RBI and banks were taken to task when the accounts were found sticky and non recoverable. With liberalisation of regulation and relaxation of supervion, the accountability for wrong doings has been given a go bye and entertainment of bad loans has been an accepted practice as they can be easily covered up. Sanctioning of abinitio bad loans is a known truth and they will eventually appear as NPAs after a few years and got written of. The Costs incurred by banks to maintain bad loabns in their books of accounts by way of supervsion of bad loans, legal expenses, insurance and maintenance of the assets of large borrwoers and final write off of loans if systematically calculated , would be mind boggling figure and unfortunately the tax payers and the depositors are made to bear the brunt. The issue of bad loans, the reasons behind their generation, how they distort banks balance sheets, how they affect the transmission of RBI's monetary policy , how they affect the cost of funds, the profitability, the morale of honest staff, etc if studied would give a great shock and there cant be any justification to keep the bad debts growing year after year under some pretext or other. Time has come to have a practical solution to prevent the formation of bad debts and nip in the bud itself the reasons behind the bad debts formation by bringing in strict discipline both on the bankers and the borropwers. The loot of money through bad debts needs to be arrested completely with immediate effect and this is possible only by being strict right from the appraisal onwards till the recovery of loans on an ongoing basis and by building up sufficient reserves to liquidate bad debts in case of any by levying a fees for wrong doings bonth on the part of borrowers and lenders. Ethical deficit crept into the system can be eradicated only with strict punishment and penalty and this needs to be attempted without fear or favour. Will it happen in our scheme of things?
Anil Agashe
8 years ago
I hate the 5/25 scheme. It is designed to protect banks that lent money without any real due diligence. The Chairman and the entire Board of these banks must be punished for such lendings. The scheme protects looters and also the banks as the restructured assets don't need to be provided for. The scheme is a fraud and must be scrapped immediately. The public at large is ignorant about this. Even the opposition parties won't oppose this as their hands have the bad blood!
Mahesh S Bhatt
8 years ago
Mukeshbhai told in Nira Radia tapes that Congress aur BJP dono aapni hi dukaan hai so why surprise.

Poor Rajan is always bitten/beaten by Group of Columbia University Planning Commission Team members /Finance Ministry team members including Jaitley/Modi etal.

Logic is take credit donot repay go bust & watch creditors cry.Simple that's new mantra.

RAJAN is of old school that take credit & also REPAY.That's a serious VALUE SYSTEM SHIFT WHICH WE ARE struggling.

Government raises land /air/water/oil(fire) prices/doenot leave ONIONS too.Farmers too die is routine.Conscious keeper Nana Patekar gears donation teams.

But who shall bell big fat shameless cats of business/politics is MILLION DOLLAR BABY??

Relax enjoy be ready for chaos anarchy to unfold and dangerous scales.

Amen Mahesh
Mohan Krishnan
8 years ago
Jandhan yojana has some more money available for looting for Corporates, Banksters and Corrupt politicians. Hope PM does not become prisoner of this Mafia.
8 years ago
Fundamentally, every organization in India is packed with incompetents who do not know the spelling of the word integrity. This is the natural outcome of the Indian Constitution and the laws and courts that flowed from them as well as the example set by the leadership for more than 69 years. Talk is cheap. For, the entrenched Kleptocracy, it is business as usual:
Dayananda Kamath k
Replied to SuchindranathAiyerS comment 8 years ago
Well said otherwise can you imagine a Karnataka high court judge in a victimization of employee for bringing out irregularities of executives in discharge of his duty as an internal auditor,case adjudicate since the employee is stickler for rules he may be given golden hand shake.
8 years ago
Completely agree this is a big Ponzi scheme. In addition, thinking more fundamentally what the problem is, I doubt any amount of rule making can bring "credit sense" to these sarkari babus. If there is no incentive for doing a good job and neither is there any penalty for losing public money, do we expect these govt employees to do a good job? Enter any PSU bank branch and we can see how hopeless the condition is. Does anyone out there look sensible enough to analyse project risks, leaving corruption aside for a moment. All they do is check if SBI or SBI caps is the lead of the syndicate and then they hope they get transferred before the default which is certain to happen. Ask anyone who approved those loans anything about those projects or that industry and they will piss in their pants. What is needed is to get govt to sell these banks rather than sink more money in these sinkholes.

Also, I have a contrarian view on the much maligned Mallya case. While he did divert money and took banks for a ride (nothing new in that, everyone does it!), this is the least worst of all cases. In this case, apart from banks, Mr. Mallya lost a lot including his entire liquor empire which was far more valuable that the airline or calendar or F1 or cricket teams. This has never happened before and it happened in this case because banks had insisted on guarantees from parent holding company and taken pledge of shares. If that was not done, Mallya would still be the liquor king. This should be celebrated as a rare banking success of small measure! May the banking system be successful to do this with few more big guns to shake the confidence of the corrupt business community.
Pradeep R Hattangadi
8 years ago
The problem of Bad Loans is one pat of the problem. The other part is the recovery of either outstandings or the assets offered as security. What has happend to the DRT? Is it really functioning or is it a parking palce for some of the Retired Judges? What about SARFAESI Act? Have a look at the Bank websites and one finds it is the guys with Housing Loan or a SME who figures in the lest put out.
Sudharshan Katipally
8 years ago
Great article, this should be read more people. Bank rules remain sceptical; on one side they give second thougths to lend few lakh rupees to the core public who are majority loyal and repays loan interest on time every time but on the other side they knowingly lend thousand of crores to the industries run by so called great people whose integrity is questionable?
Prasanna Narayanan
8 years ago
People taking loans of few lakhs for buying a car or home are screwed royally while these large scale looting happens with blessings of the government.
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