Public-sector banks have squandered away Rs 1.94 lakh crore in giving bad loans to chronic defaulters. And this is only the tip of the iceberg because information on non-performing assets (NPAs) — loans that have stopped generating returns or payback of the principal sum — is classified. There are thousands of crores that have not yet been classified, giving the banks some breathing space before the Reserve Bank of India (RBI) decides to take a closer look at their books.
Private-sector banks have stringent rules about how and who to grant loans. But in public-sector banks, favours and kickbacks have ruled the loans business for a long time. And we are only talking about secured loans, which are procured by way of real collateral in the form of pledged shares, property etc.
The story of Indian credit has evolved over a period of time as crooked promoters tried every trick in the book until the RBI, the finance ministry and Parliament kept changing the regulatory regime time and again, always arriving at the station just as the last train was pulling out.
In 1993, the Recovery of Debts Due to Banks and Financial Institutions Act was passed by Parliament, setting up special tribunals to collect the huge outstanding debts accumulated by public-sector banks. These files gathered dust in seedy buildings across the country that housed the Debt Recovery Tribunals.
Loans that were taken in the 1960s, ’70s and ’80s gathered interest and inflated until either the defaulter made an out-of-court settlement or declared bankruptcy during recovery proceedings. A few years ago, Punjab National Bank (PNB) managed to get a recovery certificate worth Rs 55 crore against a man who hailed from one of the country’s top 10 industrialist families. But, the debtor was a step ahead of the courts. In the end, PNB had to sell the certificate to a private bank for around Rs 88 lakh. After fighting for years, PNB was content with recovering its legal expenses. This is how many public-sector banks write off their bad debts.
In 2002, Parliament passed the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. By this new law, banks had the power to enforce their security interest by way of a simple notice. That means that a bank could seize the collateral offered in exchange for the loan by a simple notice and the procedures for auctioning it off were also laid down in the law. This should have simplified the process of loan recovery. But, it has only complicated it.
Financial analyst Tamal Bandyopadhyay says that the situation could have been far worse had it not been for the new law. But, project finance to corporate houses has remained out of its purview.
A report released by the Programme for Social Action (PSA) shows that NPAs reduced by Rs 32,300 crore between 2008-13. Of this, Rs 10,640 crore was actually recovered and Rs 12,970 crore was written off as a bad debt. In the 2013 Union Budget, Finance Minister P Chidambaram had promised to infuse Rs 14,000 crore into public-sector banks “to ensure that they meet the global capital adequacy norms”. That written-off sum would have been adequate instead of taxpayers’ money.
The way to delay a potentially bad loan turning into an NPA is to ‘restructure’ it. As per the PSA report, restructured loans grew from Rs 75,304 crore in 2009 to a whopping Rs 2.18 lakh crore in 2012.
In 2012, even the RBI pointed out that loan restructuring by banks was not transparent. But, this is only an indicator of a greater malady that exists. The problem begins when loans are given without proper risk assessment. If due diligence had taken place, several loan officers and corporates would find themselves at the bitter end of a CBI or vigilance investigation. What is probably worse is that when it comes to individual and small borrowers, the banks turn into Shylocks. The government is aware of these malpractices. Several government commissions and departments have started considering delisting some public-sector banks that engage in corrupt practices.
Along with number crunching on project finance, Lakshmi Premkumar, the author of the PSA report, has investigated six mega projects — Lavasa Hill City, Lafarge Surma, Sasan Power, Coastal Andhra Power’s Krishnapatnam Ultra Mega Power, GMR Kamalanga Energy and Athena Demwe Lower Hydroelectric Power.
The World Bank, through a subsidiary, and a consortium of public-sector banks financed the GMR project. The consortium provided a loan of Rs 3,405 crore. Later, it was found that the project had huge social costs, leading to displacement in Odisha and the CBI charged the project’s environment impact assessment consultant for bribing an official to obtain permits.
The cost of the Athena Demwe project was Rs 13,144 crore, of which public-sector banks and financial institutions funded 75 percent. The lead lender, Rural Electrification Corporation, sanctioned the loan to this project in 2010 even though the company did not have any clearances at that time. The project is yet to begin and was given forest clearance by the MoEF in mid-2013. Not only is the project marred by neglect of social and environmental impact of the programme, the lenders actually sanctioned loans before it had any permits, and, in fact, lobbied heavily for the permits to the project.
In the case of Reliance Power’s Sasan project, the cost was Rs 23,000 crore, of which Rs 13,848 crore was financed by an SBI-led consortium. When more money was needed, the Exim Bank rejected its proposal citing high carbon emission. But it backtracked and lent it $600 million with a promise that Reliance would generate 250 MW renewable energy, in addition to the 3,960 MW thermal energy. Last year, the loan was restructured due to the increased interest amount.
Premkumar’s research shows that between 2004 and 2011, SBI’s project financing to the private sector grew from around Rs 60,000 crore to nearly Rs 3 lakh crore with a proportionate increase in NPAs, which doubled during this period from Rs 5,620 crore to Rs 9,217 crore.
The Rs 1.68 lakh crore Lavasa project is a classic case of undue benefits shown to a politician’s kin. The man in question is Sharad Pawar’s son-in-law Sadanand Sule. In 2012, the CAG found that the Maharashtra government had showed several leniencies to the company, in which Sule owned a 21.97 percent stake. Eventually, the project landed in the courts over questionable land acquisitions and for flouting the environmental norms. Meanwhile, the CBI is probing the role of Maninder Singh Johar, the director of Central Bank of India, which loaned Rs 400 crore despite “unfavourable reports”.
But, no corporate debt and inefficient banking story will be complete without the mention of Kingfisher Airlines, which experts call the “the rogue borrower”. Vijay Mallya’s UB Group has bad loans worth Rs 13,000 crore, of which the grounded airline owes Rs 8,000 crore.
Yet, the lesson to be learnt from Kingfisher’s case is efficient private banking versus inefficient public-sector banks. HDFC Bank stays clear of such financing and when the debt started growing colder, ICICI Bank pulled out. But banks such as SBI and PNB stayed in the fray, “holding the can” as a financial analyst puts it.
The PSA report exposes the lack of moral, social and prudent efficiency that have become the standard practice of the public-sector banks. But, financial analysts say that it must be taken with a pinch of salt.
“There is a crisis in the Indian economy and it is reflected in the banking sector,” says analyst Bandyopadhyay. “When the economy bounces back, the size of the NPAS will start to shrink, apart from the usual chronic defaulters.”
“The SBI is the proxy of the economy and will reflect what is wrong with it at certain times,” he adds. “The NPA crisis is huge and might get marginally worse until the economy starts to strengthen. That is the dilemma with the whole financial sector. In the case of the external commercial borrowings (ECB), the RBI has been repeatedly warning corporates against taking unhedged ECBs. No one knows the size of the ECBs and it changes with the rupee fluctuating vis-a-vis the dollar. There is some breathing space while the rupee stabilises but more care is required while raising such finance.”
With the situation as it is, the only hope for the economy and public-sector banks is a change in the management of the economy. The PSA report shows the result of speedy environmental and other clearances, but at the same time, the economy will not grow and the banking sector will sink steeper into NPAs. Let’s see what rain the Lok Sabha election brings to economy and finance.