Rising Bad Loans Expose Faultlines in India’s Banking System



It has happened several times in the past. It is likely to continue in future too, unless drastic measures are adopted. Twenty nine state-owned banks have written off their bad debts worth Rs 1.14 lakh crore in the past three years. The loans waived off between 2004 and 2015 is Rs 2.11 lakh crore and the banks are all set to charge off another Rs 52,227 crore by the end of this year. Most of the defaulters who have benefitted by this write off in the past three years are who-is-who of corporate India.

Troubled loans have choked banks capability to lend, thereby hitting poor borrowers. Lenders have been particularly reluctant to extend credit facilities to those engaged in farming or to small businesses. The hurdles to get credit for agricultural purposes and the pressure piled by banks to recover the loans following crop failures have contributed in a major way to a spate of farmer suicide across the country.

In a stunning disclosure, the RBI recently said the stressed loans which stood at Rs 15,551 crore in 2012 galloped to Rs 52, 542 crore in 2015. The mounting bad debts which reflect institutional failures, lack of oversight from regulatory and monitoring mechanisms come at a time when successive governments have been claiming that the fundamental of our economy is strong.

In a bid to camouflage the enormity of the problem, the finance ministry and the central bank have defended the move saying “writing off of non-performing assets (NPA) is a regular exercise conducted by banks to clean up their balance sheets and a tool to manage their liabilities on impaired assets.”

A former top official of the RBI , however, has termed the waiver a ‘scam’. The total loss to the exchequer amounts many times more than that of 2G scam or Coalgate, he alleged. There have been several instances when bankers have taken kick backs from promoters to absolve them of liabilities. Even though half a dozen senior bank executives were arrested few years ago for cutting sweet deals, the case seems to be dragging on.

Trade unions say NPAs are money fraudulently siphoned off from the banking system and wants the apex bank to periodically publish the list of bad loans. They have also been pressing the government to initiate criminal proceedings against wilful defaulters.

Before the government gets ready for another round of capital infusion into the banks, it should amend recovery laws and tighten regulations. There should also be earnest attempts to recover the bad loans by monetising the assets of defaulters. Otherwise this excercise will end up as just another window dressing and cyclical wastage of tax payers’ money.