Will an Ordinance Solve the Colossal Problem of Bad Loans?
On 5th May, president Pranab Mukherjee gave his assent to an ordinance to amend Section 35 of the Banking Regulation Act, 1949, empowering the Reserve Bank of India (RBI) to tackle bad loans of public sector banks (PSBs). Since details of the ordinance were not available at the time of writing this piece, it remains to be seen if the government has, finally, found the magic potion that will make the Rs6.46 lakh crore mountain of bad loans (at the end of December 2016) disappear. Expectations from the new ordinance are running so high that bank stocks have shot up 30%-50% in a few weeks. The run up started long before news of the legal amendment became public. 
A newswire reports that the legal change will allow RBI to offer specific, case-by-case solutions, including relaxation of terms when required. Moneycontrol.com reported that the new law may empower banks to force corporate defaulters to “forego ownership and voting rights in their companies, allowing lenders to induct new management leadership mandated to turn around these entities within a specified time frame.” It is also reported that the ordinance would ring-fence bankers from scrutiny of their actions against chronic defaulters.
Will This Solve the Bad Loan Problem? 
There is nothing in the past two decades to suggest that the sphinx-like RBI will suddenly turn into a dynamic organisation that goes after defaulters. On the contrary, enacting one statute after another—whether SICA (Sick Industrial Companies Act), SARFESI (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) or the Insolvency and Bankruptcy law—has not made any difference, as yet. In fact, the global financial crisis turned into an opportunity for the nexus of banks-crony capitalists-bureaucrats to engineer a sharp spike in bad loans. 
At this time, when the government is figuring out ways to recover bad loans, the three biggest stakeholders of banks are extremely unhappy. Bank employee unions are furious with every trial balloon that the government has floated in the media (bad bank, re-privatise or de-nationalise banks, mergers), the freeze on recruitment and having to bear the brunt of all the extra work during demonetisation and after. 
Bank depositors are angry that banks have been shoring up their profits by levying newer and more unconscionable charges on them while RBI watches in silence. Investors, who bet on public sector banks (PSBs) after the prime minister took the unusual step of engaging with senior management in person at a special retreat called the Gyan Sangam, launched Indradhanush, a seven-point programme to clean up banks, and set up the bank Board Bureau (BBB), are completely perplexed. The BBB has quickly turned into a shell with no voice or powers, while the Gyan Sangam has not even translated to efficient appointments or better accountability at banks in the past three years of the NDA  government. Instead, PSBs have been dancing to the tune of the prime minister’s office (PMO)—first, to open millions of Jan Dhan accounts and then struggling to cope with demonetisation since November last year. 
A speech on 28th April by RBI’s newest deputy governor, Dr Viral Acharya, made some important points on the bad loan issue. Citing the Global Financial Stability Report of the International Monetary Fund (IMF), he said, the “Indian industrial sector is now among the most heavily indebted in the world in terms of the ability of its cash flows to meet its bank loan repayments.” Also, that the Indian banking sector is worse than those in other emerging economies in terms of how little capital it has set aside to provide for losses on bad loans, primarily given to the industrial sector. 
Dr Acharya made no bones about the fact that recapitalisation essentially amounts to “throwing more money after the bad.” He pointed out that, after the global financial crisis of 2008-09, “Banks that experienced the worst outcomes received the most capital in a relative sense. Most of these banks need capital again.” He contends that allocation of capital must not be so poor that it becomes ‘Heads I Win, Tails the Taxpayer Loses’, and sows the seeds of another lending excess.
Many of us had followed what happened then under the UPA government. Corporate India lobbied hard and furiously for help and, eventually, prevailed on the government to offer a huge relaxation on repayments. This quickly triggered a series of shady accommodation deals and banks made no effort at recovering the loans even after the crisis had blown over, leading to a sharp spike in bad loans from 2010-11 onwards. The All India Bank Employees Association (AIBEA) has put out enormous amounts of data about how bad loans spiralled after 2007-08 and how the top 50 borrowers owe over Rs40,000 crore to PSBs. AIBEA has published the names of these corporates and released them to the media, even while RBI has been acting coy and disclosed the names to the Supreme Court, in a sealed envelope. The top names in AIBEA’s list, which is a couple of years old, predictably include Vijay Mallya’s UB Group, Winsome Diamonds, Forever Precious Jewellery, Electrotherm India, S Kumar group, Zoom Developers, Sterling Biotech and Surya Vinayak Industries. Many of these promoters are unknown to the public and still managed to ditch loans in excess of Rs1,000 crore each. None of this has happened without the complicity of senior bankers or under duress from their political masters. 
The employees’ union pointed out that provisions made for bad loans, in the five years from 2008 to 20013, were a whopping Rs1,40,000 crore. Also, in the four years from 2009 to 2013, PSBs piled on fresh bad loans of Rs3,15,465 crore. 
So what is the solution to the problem? Dr Viral Acharya offered five options but only one of them really hit the headlines and triggered a spate of protests from bank unions. 
1) Healthier PSBs should raise private capital through deep discount rights and share the government’s burden of recapitalising banks. 
2) The better PSBs should sell non-core assets, insurance subsidiaries, market-making divisions, foreign branches and raise funds for recapitalisation. 
3) Bank consolidation through mergers should be used as a way to create healthier banks. This could be a precondition to further recapitalisation, he suggests. 
4) Tough prompt corrective action (PCA), under RBI’s new guidelines, which “should entail no further growth in deposit base and lending for the worst-capitalised banks” and eventually “encourage deposit migration away from the weakest public sector banks to healthier public sector banks and private sector banks.”
5) Re-privatising some of the nationalised banks to reduce the overall amount that the government needs to inject as bank capital and help preserve its hard-earned fiscal discipline. 
Dr Acharya’s suggestions sound good but have little chance of being accepted by prime minister Narendra Modi who is clearly a believer in using the public sector alone to implement his policies. Dr Acharya himself would agree that merely raising private capital will not lead to better lending decisions, unless there is a drastic change in the appointment, remuneration, accountability and audit rules for the top management of PSBs. This has to be an important precondition to re-privatise banks or even consolidation through merger of weak banks with strong ones, as suggested by Dr Urjit Patel. 
But the angry opposition to Dr Acharya’s ideas from bank unions was equally to be expected. AIBEA has a point when it says that loans given to the private sector account for ‘97% of bad loans’ and RBI must find a way to catch the defaulters and recover the money, instead of pushing the burden on “on to the shoulders of banks or the nation at large.”
At the time of writing, we do not know whether the ordinance will help put together an effective plan to make wilful defaulters pay up without using a slew of existing statutes and a slow judiciary. 
Gopalakrishnan T V
7 years ago
The problem of NPAs will be perennial as long as the politicians , bureaucrats manage the banking to suit the political objectives ignoring economic feasibility and commercial considerations. This has been going on for decades and the loss of depositors, tax payers ,and other stake holders of the economy by way of GDP growth and distribution of wealth on account of this systematic and planned loot is something enormous and cannot be arrived at even by a genious. It is high time the public get seized of of this erosion of wealth and make a fight through Court and all other means to have a lasting solution in the interests of the welfare of the society and the whole economy. Banks have lost their sense of Judgement and have turned to depositors the very providers of funds to enable them to be in business to augment the revenues by all unethical means . The Corporates balance sheets are weak and how they get support from banks is a mystery and will continue to be a mystery with all regulations and supervision. Several Acts and Institutions have come into being to eradicate the NPA menace but no one has cared to do a cost benefit analysis. The expenditures are definitely more than the recoveries of bad loans. RBI's presence has been there for decades but the NPA menace has never stopped and RBI is only a silent spectator knowing fully well how the NPAs get generated but remaining helpless to remedy it. New ordinance also cannot have any favourable response as the nexus between banks and industrialists with the support of politicians , bureaucrats, Auditors and lawyers is so strong with greater understanding that nothing
can help to stop the loot .
Parimal Shah
7 years ago
Indian politicians have an Ostrich mentality.
They make rules and laws and after that they think the problem is solved.
They do NOT care to ensure proper and strict implementation of the law.
There are enough laws but extremely poor or almost nil execution and implementation of the laws as of now - and was much worse in the UPA - 1 & 2 and before that for almost 3 decades.
7 years ago
Even after Ordinance, don't expect any improvements. The top NPA borrowers are those who are well connected with power centres. Kingfisher is only an exceptional case to show the world. If the Government is serious, it should start with making Bank Boards independent from the Ministry, make selection process to top PSBs transparent one, make wilful default, a criminal offence and debar NPA corporate promoters from holding public office. Will the govt. bite the bullet?
7 years ago
I agree with Dr. Viral Acharya's suggestions, which I believe is the need of the hour in the present crisis in the banking sector. I am unaware whether the ordinance is framed only for the PSBs or the banking sector as a whole. In the Cooperative Sector in many cases the situation is extremely bad caused by the Staff, directors and the fraudsters hand in hand with recovery chances being extremely poor due to non observance of basic lending norms while granting advances e.g. CKP Cooperative Bank, Kapol Bank etc.
Sunil Prakash
7 years ago
Just Ordinance will we like any other ordinances. We need to penalise the Bank management from top to bottom as they had their booty and without their involvement in disbursing loan this was not possible. They are equal party and they should be penalised equally.
Chandragupta Acharya
7 years ago
Option 4 of Dr. Acharya’s list seems best and practically implementable. It is best to freeze fresh lending, shrink balance sheets and gradually wind down the business of these banks. The objective can be achieved by just keeping the deposit rates below market and lending rates above market rates. Eventually, their real estate can be revalued and branches sold off one by one. This will be a permanent solution. Private banks, MFIs, SFBs and NBFCs can take over the ceded market share – none of these are dependent on taxpayer money.
B. Yerram Raju
7 years ago
PSBs were in 'thrust' business or thirsty business? Second, internal audit reports, annual audit reports of the Banks, remarks of the auditors on the NPA portfolio of each bank should have been read by the RBI and if already not read the oversight team should now read, fix accountability and take action for recovery on strategic modes simultaneously. The RBI and GoI should not hesitate taking action even on the Chair persons of the Banks if the remarks below the bottom lines so warrant. Credit risk assessments and due diligence of the Directors of the companies financed by the Banks and annual reviews of them at the times of renewal of limits year after year and the structured deals afforded to them as per RBI guidelines should all be subject to review. Nominee directors' role in Board sanctions should also be specified.
GLN Prasad
7 years ago
What is all the ordinance about ? Giving directory powers to RBI ? You want someone to come and intrude into your financial affairs and to advise you what to do and what not to do to recover the money advanced by you, by your officials. What happened to internal mechanism ? Is it the proof that their internal controls miserably failed and you want to give the stick to others to follow directives given by them, though you have advanced the amount, and no one is better equipped than you to take decisions. Strange.
Govinda Warrier
Replied to GLN Prasad comment 7 years ago
One wishes, systems were perfect and Self-regulation minimized need for the kind of regulatory oversight and supervision. In an ideal situation, regulatory organizations, police, army and several enforcement agencies will be slimmer and just be there to point out aberrations.
Mahesh S Bhatt
7 years ago
Man's propensity to earn more than he deserves has lead him to Untold miseries & disasters. Mahesh Bhatt
Anand Vaidya
7 years ago
Another method that can be used is to move all banks under a govt holding co. reporting ONLY to PMO or FM. Disallow all political intereference, including loan sanctions, appointments etc. Hold FM or PM directly responsible for the holding co performance. Banks are suffering only because corrupt politicians force banks to lend to unworthy borrowers.
Deepak Narain
7 years ago
I wish you had also added the-bank-wise details of bad loans as also the bad loans added during the NDA regime. The continuance of bad loans will dent the image of the government. Stern quick action needs to be taken for recovery and fixing of responsibility. The politicians involved should also be held accountable.
7 years ago
I am thirsty, I said. And thought I had made myself perfectly plain. The creature glared at me for I had disturbed its notions. It pondered a while, delved deeply into the recesses of somebody else's memory and wrote "water" on the Black Board. It strutted about and preened. Peered at me and waggled its eye brows at me. I am still thirsty I said. It was quite offended. It got up and wrote, in big letters, such that the chalk squealed on the Board as if to dare me to undergo the pangs again by daring to be thirsty, "WATER". I gathered up the strength for another aazan on the board and said, plaintively this time, I am still thirsty. And, then, hopefully, this time, very, very thirsty. The thing glared at me furiously. It got up. Walked around itself and wrote on the Black Board in irrefutable and definitive characters, "H 2 O". I stared back defiantly and told it, I am still mighty thirsty. The creature went away and came back after some time with a fresh board.

In India, laws are considered capable of achieving anything from abolishing caste enshrined in the Constitution to gravity enforced by nature. The sign of an infantile casteist, communalist, totalitarian, ouroboros Republic masquerading as a secular democracy. No ordinance can undo nearly five decades of Government (i.e. reservations and extortion/corruption) owned and operated banking and the addiction reflected in the momentum of bad loans (aka non performing assets)

Ramesh Poapt
7 years ago
yesterday, I enjoyed to see so many colorful, eye-catching soap bubbles
yesterday, i enjoyed many colorful,eye catching soap bubbles in children mela shop! though not more bubbly than what we see nowadays many like one above .....!
7 years ago
I am of the opinion that the bank staff should assist their organisation in recovering the borrowers overdues, as the overdues at present are extremely high and this is the need of the hour to assist their organisation.
Govinda Warrier
7 years ago
If banks remaining in public sector is a hurdle and if private sector banks can provide the services and take over a higher share in banking business, there's no ban on private sector banks improving their share in banking business from the present below 30 per cent.
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