Good Start to Bad Loan Issues but a Long Way To Go
Piyush Goyal, a former nominated director on Bank of Baroda (BoB) and State Bank of India (SBI), probably understands that the dangerous drift caused by the scams and losses at public sector banks (PSBs) which, compounded by actions of the past four years, could snowball into a serious crisis. So it is just as well that prime minister Narendra Modi has given him temporary charge of the finance ministry, until Arun Jaitley recovers from kidney transplant. 
Like a good politician, Mr Goyal also understands the optics very well. So his first action on taking charge was to hold a day-long meeting with the heads of 11 PSBs that have been placed under prompt corrective action (PCA) by the Reserve Bank of India (RBI) and go public with his assurance of ‘all possible help’ to come out of the PCA framework as quickly as possible. Under PCA, RBI has placed severe restrictions on 11 PSBs including on distribution of dividends, remitting of profits, expansion of bank network and fresh lending, as well as capped management compensation and directors’ fees. The 11 banks are: Dena Bank, Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce and Bank of Maharashtra; these account for 30% of the deposits and advances of all PSBs. 
Remember, Mr Goyal had faced a similar situation on 29 September 2017 immediately after taking over as railway minister. A horrific stampede that killed 23 and injured 39 at the Elphinstone Road railway station (Mumbai) exposed the neglect of crucial infrastructure at the exploding business hub in central Mumbai. Mr Goyal held day-long meetings with railway officials and, once it was clear that the railway corps were unlikely to construct a foot-over-bridge quickly, he called in the army and got it done in record time; it was also a signal to the railway bureaucracy and engineering department that they would have to buck up and mend their ways.
In the banking sector, the massive pressure of bad loans is probably a bigger problem than the creaking and outdated infrastructure of the railways, although it does not lead to fatalities of the Elphinstone Road kind. The non-performing assets (NPAs) are officially estimated at Rs8 lakh crore; but, according to Dr KC Chakrabarty, former deputy governor of RBI, a more realistic figure is Rs20 lakh crore. RBI’s new norms for income recognition have already forced a spate of new disclosures from PSBs as well as high-flying private banks. 
Mr Goyal has started with a lucky break at the finance ministry. The Insolvency and Bankruptcy Code (IBC), rammed through by the prime minister, delivered its first big breakthrough a day after Mr Goyal took charge at the finance ministry. The controversial Bhushan Steel, whose total debts were a massive Rs46,062 crore (almost equal to the national budget on school education, says a media report), was acquired by the Tatas at Rs36,400 crore and a 12% stake in the company. What makes this truly historic is that the lenders got back most of their principal. Quick to emphasise the significance of the Bhushan Steel acquisition, Mr Goyal tweeted that the price paid by the Tatas (which many think is too high) is four times the estimated liquidation value of Rs14,541 crore.
The biggest breakthrough, however, is to the prime minister’s credit. It is probably the first real signal to the crony capitalist club that its unlimited ability to influence government is, finally, over. In the Bhushan Steel case, too, the promoter group, despite being caught bribing the Syndicate Bank chairman for fresh loans, is leaving no stone unturned in trying to delay and sabotage the resolution process through multiple litigations by some proxies. This exemplary display of strong political will was, unfortunately, eclipsed by the many recent banking scams (Nirav Modi and the jewellery scams) and the politics in Karnataka. 
Another breakthrough, which went almost unnoticed in the mindless and disruptive public debates that have marked this government’s tenure, is the big victory against the flamboyant liquor baron Vijay Mallya on 8th May. A court in the United Kingdom ruled that a consortium of Indian lenders can impose an Indian court’s decision against Mr Mallya and also refused to overturn a worldwide freeze on his assets. Although Mr Mallya can, and will, probably appeal that decision, a full reversal of the order seems unlikely after the judge disallowed an automatic appeal of the order.
Those of us, who have long followed first-hand Mr Mallya’s skill, at gaming the judicial system and ‘influencing’ regulators and investigators handling his cases, understand the political message behind India fighting and winning a good case. Otherwise, from Bofors to Bhopal and innumerable others, our regulatory agencies are legendary for making a hash out of the open-and-shut cases and losing them in international courts. 
Although the amount involved in Vijay Mallya’s case (Rs9,000 crore) is significantly lower than in the Nirav Modi-Mehul Choksi case (Rs14,000crore) or the top12 defaulters, including Essar Steel, identified by RBI, the determined action signals that escaping abroad, to live on money stashed in tax havens, is no longer as safe and sure as it was in the past. 
But, remember, these are just small, initial victories in tackling mammoth NPAs and the industrialists who owe banks big money are busy with their frantic machinations to bid for their companies through foreign fronts. If allowed, the resolution will be nothing more than a round-robin deal where dubious industrialists will bide their time and buy back their companies once the controversy has faded from public memory—again financed through fresh bank loans.
To the government’s credit, the prime minister’s advisers have been open to feedback about such manoeuvres and there seems to be some determination to thwart such collusive deals. The resolution of Essar Steel, which is going well so far, is a big test case. The outstanding debt in this case is over Rs50,000 crore with interest, at the end of 2017.
Another big test for the government is how it handles Air India. The bid conditions have disappointed powerful potential bidders and, according to the scuttlebutt, there is a deliberate attempt to arm-twist bidders to favour political favourites. We can only hope that the good work in resolving Bhushan Steel and other cases is not undone by bad decisions in Air India. Although some of the bid conditions have been relaxed, based on feedback, aviation experts believe that the present proposal, which does not realise the value of various parts of Air India’s businesses, is not the best way to sell the national carrier.  
A few big resolutions of NPAs will be a big help to the government in its 2019 election campaign. But the turnaround of banks requires a lot more work to ensure that things do not slide back into the messy ways of the past. Mr Goyal is correct in blaming the United Progressive Alliance (UPA) for most of the problems of bad loans, but his own government has done nothing to improve the basic structure of PSBs, make bank management and regulators more accountable and independent, give teeth to the Banks Board Bureau or end the dubious practice of writing off loans of large corporates as a clean-up and tax-saving measure (Dr Chakrabarty has called it the ‘biggest scandal of the century’). 
What we have just seen is a very positive first step; but we need a lot more determined and unwavering action to achieve a real turnaround. One banker puts it correctly, if rather facetiously, when he says, “Piyush Goyal’s sound bites are, indeed, good; but will they turn into a symphony or mere cacophony?” Well, the country is watching.


5 years ago
Recovering NPA which occurred due to market conditions or poor company performance is one thing but willful defaulters who swindled with help from the bank officials should be put behind the bars. Else this would repeat in another 4 or 5 years.
Karan Gandhi
6 years ago
All the best to Mr. Goyal, more strength to him!
Sunil Prakash
6 years ago
A beginning has to be made . Now the question is for how many days will Piyush Goyal manage his beginning. Will Politicians directly involved will allow him to function effectively? It a nexus of the the politician, the bureaucrat and the industrialist. Industrialist will do it because the Politician wants him to do. Bureaucrat is enjoying because he is getting his booty too with no efforts. he is a puppet in the hands of politician and the industrialist.
Ramesh Poapt
6 years ago
will shri Jaitley occupy his chair again?
S Hariharan
6 years ago
"JENO RAJA VEPARI ANI PRAJA BHIKHARI" Old Gujarati proverb, Modi might well be aware of, applies here very well. Ask all these PSBs to start winding up, with mergers with profitable banks.
S Hariharan
6 years ago
Why not allow mis-managed PSBs to fail? Any re-finance should involve condition of change in management from top. Re-finance should also be act of parliament. Government should not be a safety net for gambling with taxpayers money. With the onset of new generation, less competitive companies/institutions fail and it should not be stopped.
Replied to S Hariharan comment 6 years ago
It is not that easy to allow psbs to fail.
PSBs have many stakeholders,the most important being the staff. Will they keep quiet?There will be anarchy. PSBs are like a hot ghee phenomenon. We can neither swallow it nor leave it.
S Hariharan
6 years ago
Piyush Goyal must explain what is the help he is going to do for 11 PSB under RBI watch. Lots of money is already wasted by recapitalisation.The arrest of few executive and CEO is not going to change much in the PSB. It's a news item in the papers to be read and thrown into the dustbin. Why is the government with full majority nor in a position to even do a little?
Finance ministry has failed specifically with banking sector which is in the worst phase. If not for government being the owners of the bank all would have closed that is the really position of banks today.
Suketu Shah
6 years ago
Goyal is good FM minister but the work he wl do in 5 yrs as FM ,Dr Swamy will do as FM in 5 months is less.
Replied to Suketu Shah comment 6 years ago
What Swamy may do has not been mentioned.
Replied to Suketu Shah comment 6 years ago
God bless us that Modi hasn't fallen for the so called "Doctor" Swamy's charm... don't know what good he can do in 5 months, but one thing is sure that we will be compared with banana republics and bankrupt countries in 5 weeks only.
Gopalakrishnan T V
6 years ago
well written piece. The banks are being made non perforeming with planned loot and this needs to be stopped once for all. Genuine failure of business and bad debts in banks are understandable but the way the loans running into crores and crores are turning bad debts is something beyond comprehension . In this context one is reminded of only what our former Prime Minister Mr Atal Bihari Vajpayee said "We cannot allow peoples' faith in economic liberalisation to be shaken by those who do business with an ethical deficit". Lack of professionalism in banks' Boards and lack of discipline among the large borrowers have contributed to the mess in banks and unfortunately all stake holders of the economy are made to suffer perennially. While the present inititiative of the Government through Insolvency and Bankruptcy Code can definitely bring in solid improvements in the recovery of bad debts provided the same borrowers are not allowed to thwart the scheme through devious means , what the banks need is long term and lasting solution to prevent the formation of bad debts through bringing in professsionalism in banks Boards and corporate borrowers in running their businesses. Effective Corporate Governance in banks and accountability to the parliament can improve the health of both banks and corporates balance sheets and make them substantially contribute to the overall growth of the economy. The acting Finance Minister with his solid finance background and having brought in tangible results in the energy sector can definitely make the banks and the bad corporates perform better and make the dream of the PM to make the economy grow fast and achieve welfare for all a reality. Will it not be a good idea to introduce a built in mechanism to discipline the borrowers and banks and find resources to liquidate bad debts if any by not taxing the tax payers and other stakeholders of banks?
6 years ago
In India, the more unviable the industrial units, the more enviable is the life style of the industrialists. Industrialists have learnt the art of leading their units to sickness and themselves to prosperity. Ultimately good money goes down the drain chasing bad loans. The country is having to pay heavily for the well-being of a few. This is untenable. Moneylife's and Sucheta Dalal's efforts in making the banks, public and government aware of this disease and forcing them to treat it are worth appreciating.
6 years ago
It is quite refreshing to know Money Life and Sucheta Dalal ,(who are usually critical of Central government's policies)have appreciated Piyush Goyal's efforts.

Linking these efforts to 2019 elections is a bit far imagination.
Indian electorates by and large have been swayed by freebies and cheap politics.

Good economics has never been a game changer in Indian politics.

On the other hand bad economics
(bank nationalisation,farm loan waivers‌,directed lending,meddling with top appointments in banks,etc)has led to good politics.

This has been responsible for usurping power at the centre and at the states.
6 years ago
Good to see some constructive criticism of the govt along with some credit, where it is due.... we hope that this NCLT process, with all its fits and starts, ends up putting at least some of these big crooks out of business forever... the same people have repeatedly been gaming the system every 10-15 years and each time on a much bigger scale. The fundamental rule of NCLT that a defaulter can't buy another business should be extended to lending by banks in perpetuity so that the likes of Essar or its family under any name are never able to borrow ever again. Expecting these corporate criminals to go to jail might be too much in our country, but hopefully we can at least throw them out forever... to find a positive in a negative to keep the mood good, let's consider the exit of Mallya from India as the guarantee that he won't be able to loot us ever again. Hope all the corporate criminals like him are also thrown out of India if not in jail so that we can start again on a clean slate (70 years late!) and develop a new breed of clean businessmen hopefully!
6 years ago
Thank you for superb write-up.
6 years ago
We all hope Piyush Goel, acts fast to bring all the guilty to justice impartially. He is the right person for the job, as his performances has shown extremely good laudable results, in the power and railway sectors. Wishing and hoping, it turns out to be the first positive step in the banking sector.
jaideep shirali
6 years ago
IBC and the resolution process are a great way to start, but as we can see in some of the NCLT cases, disgruntled suitors are pushing matters ahead to the NCLAT and will approach the SC as well, delaying the process. What is critical is how Mr Goyal will put a stop to rampant political interference once and for all in the lending and operations of PSU banks, because only a free hand to balance business with social objectives will be the long term solution for PSU banks.
Free Helpline
Legal Credit