Dr Ashwani Mahajan
When four years ago as the then Governor of Reserve Bank of India gave a statement that, Indian banking is in crisis as some big corporate are not able to repay their loans, the whole nation was taken aback. We understand that, at the time of sub-prime crisis in USA banking was shattered not only in the US but in most part of the globe. However, Indian banks were not only affected, their profits were booming. If we leave aside some exceptions like ICICI bank and a few other private sector banks, which were partially affected, Indian banking system in general had become a symbol of strength in the world. Our policy makers were taking pride in saying that, Indian banking system is delinked from the global banking system and therefore upheavals elsewhere cannot affect the same.
There is no doubt that Indian banking system has been much stronger than the American and the European banking system. However, for the last more than four years Indian banking has been going through a serious crisis. Non Performing Assets (NPAs) of Indian banks, both private and public have reached nearly Rs. 9 lakh crores.
When and Why NPAs Increased?
For any loan to become NPA there could be two reasons. First, due to bad management or corruption, loans are given without scrutiny or assessment and borrowers are unable to pay back. Secondly, due to slowdown in the economy, business houses/corporate are unable to make repayment of loans. If we go deep, we find that because of the economic mismanagement, scams and crony capitalism of the previous UPA Government, many loans are found to have been given without reasonable scrutiny and loans have become NPAs now. It is possible that, there are problems of repayment of loans by many businesses/corporate due to slowdown in the economy and it is found that major amount of loans have become NPAs due to faulty distribution of loans. Cases like Vijay Mallya, NiravModi etc. are examples of the same, where either the financial credentials were either ignored or scams were not stopped due to lackluster approach or connivance of the management with the borrowers. Lack of technical capabilities of the banks is also being seen as a reason for lack of timely detection of the scams.
Last UPA Government’s regime was full of scams. Many big scams were brought to light by Comptroller and Auditor General of India (CAG). Distribution of loans to otherwise ineligible candidates can be considered to be an extension of these scams. It is notable that most of the NPAs and banking scams which have been exposed are where loans were granted under previous UPA regime. Although most of the directors in banks are nominated by Government or the Reserve Bank of India, however, in the event of scams nobody seems to take the responsibility of the same. Interestingly, in the event of borrowers fleeing the country, those in whose regime these loans were given, blame the present government for allowing the culprits to flee.
Need to deal with the menace without politicking
For the last few years, since NPAs had been rising blame of the same is being put on the mismanagement of the present government. Opposition leaders are also heard saying that government is writing of these loans. They try to create this impression that these loans have been waived off andborrowers of bad loans have been relieved of their liability. However, the fact of the matter is that in 2017 merely 13 percent NPAs have been written off (not waived off), as compared to 25 percent during 2011 (under UPA Government). We must understand that writing off loans is a process under law with respect to NPAs. However, it does not imply that borrowers have been relieved of their responsibilities. Government has actually been making different efforts to recover these bad loans, of which passage of Insolvency and Bankruptcy Act in 2016 is the most important step. According to this law if any individual, firm or a company is unable to honour its liabilities within a specified period of time, its assets would be sold off according to a specified process and loans would be paid. Prior to this there was a long process of declaring any individual firm or a company insolvent and therefore, the burden of loans and interest would increase multifold in the meanwhile.
Bad Loans are Returning Now
As per the information published by Department of Company Affair so far Rs. 4 lakh crores of the loans categorised as NPAs have been recovered up to 2017. Apart from this strict action are being taken against the willful defaulters. Whether it is Vijay Mallya or Nirav Modi, serious official level talks are going on to bring them back and attach their properties in foreign countries. According to the Secretary, Department of Corporate Affairs, Government of India, in the month of June 2017 twelve cases were referred to the department out of which, half of the cases, encouraging outcome has been noticed. Reserve Bank of India has referred 21 cases to Insolvency and Bankruptcy Board on which action has been initiated. It may be noted that once such cases are referred to the board, 6 months’ time is granted, which could be extended by another 90 days. According to board’s chairman, the board has received cases with respect to 650 companies, of which action has been initiated in case of 500 companies.
Apart from this, Government is also providing a sum of Rs. 2.11 lakh crores for recapitalisation of NPA ridden public sector banks. With new Insolvency and Bankruptcy Law on the one hand and recapitalisation of the banks on the other, the solution of NPA problem is very much insight. Those who are trying to rake up the debate about privatisation of public sector banks should exercise restraint and opposition should also stop politicking the issue,so that confidence of the people could be reestablished, in the banking system.
(The author is Associate Professor, PGDAV College, University of Delhi)
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