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Bad Loans and Bad Bank

Thomas Franco
   Tuesday 28 February, 2017  

The economic survey presented by Dr. Aravind Subramaniam, Chief Economic Advisor talked about creation of a Public Sector Asset Rehabilitation Agency (PARA).  The new Deputy Governor of RBI who is a known votary of Privatisation, who has taken leave from New York University for 3 years and joined RBI has stated in an interview that there should be two bad banks one in the Private Sector and one in the Public Sector.  The latest report on NPA Published in Business Standard states that India’s bad Loan Problem is getting worse. The gross non performing assets have reached Rs.6.2 Lakh Crores at the end of Q3 FY17, an increase of 56% over the previous years.  The Asset Reconstruction Companies have not made any significant headway. The name Bad Bank itself is bad.  It is nothing but a new avatar of ARCs.

Where are the Bad Loans? In a written reply to the Parliament, the Minister of State for Finance has stated that there were 661 NPA accounts about 100 crores amounting to Rs.3.7 lakh crores from Public sector Banks as on March 31, 2016.  He also stated that NPA is high in infrastructure, road, textiles, steel etc.  In April 2016, RBI has stated that the top 10 Corporate NPAs amount to RS 56,000 Crores. Supreme Court has obtained list of defaulters owing more than 500 crores from RBI.  But RBI has requested not to publish the list saying that it would dent the fiduciary relationship between RBI and the Banks and between the Banks and customers.  A report of RBI as on March 2015 shows that 42.4% of the total advances of scheduled commercial banks are given to Private Corporates.  The same report shows that there are 11000 accounts with a credit limit above Rs.100 crores which constitutes 36.9% of the total credit limit.  Credit limit above 25 crores to 31965 borrowers constitute 15.9%.  Credit limit above 10 crores and below 25 crores to 41826 borrowers constitute 6.7% of the credit limit.  That means 59.5% of the credits are above Rs.10 crores to just 84791 borrowers.  On the contrary, only 0.5% is given to 20.7 million borrowers with credit limit less than Rs.20,000 and only 7.7% is less than Rs.2 lakhs limit given to 8,12,67,021 borrowers. The NPA in this segment is meagre.  So let us understand for whom this bad bank is and for whom the right offs are helping.  In a country with 127 crores population to catch less than 1 lakh borrowers we don’t have any power, because the Govt not only has the will but also supports these defaulters.  Bad Banks and ARCs elsewhere have helped the defaulters to sell off their loans at a cheaper rate and also buy back the assets at cheaper rate using another name.  If the Govt and RBI are really serious let them implement the recommendations of the Parliamentary standing committee submitted on February 24, 2016. The summary of the recommendations are

  1. Accountability of nominee Directors of RBI / Ministry on the Bank Boards as well as the CMDs / MDs of banks should also be annexed in the matter.
  2. The decisions taken to sanction loans in violation of norms/guidelines should also be enquired into, responsibility fixed, adequate penal action taken.
  3. Till such time a project is commissioned as per approved schedule, banks should not hasten to categorise such a project as NPA.
  4. The extent and the quality of the equity that the promoters are capable of infusing into a project, therefore, also needs to be factored in by a lender bank.
  5. The Government should make the necessary structural changes including revival of Development Financial Institutions (DFI) for long-term finance, especially for Infrastructure projects, which will go a long way in nipping the problem of NPAs in the bud.
  6. Urge the Government for allowing Infrastructure Finance Companies (IFCs) to purchase infrastructure projects turning into NPAs and keep them as Standard Assets, as this step would not only provide the much needed relief from stressed portfolio but also create an enabling environment for funding the infrastructure sector facing resource crunch. Besides, the IFCs should also be allowed to participate in equity. The Banks should have equity component built in the loan agreement itself. The Committee desire that the RBI should explore the possibility of developing a mechanism wherein there would be separate norms for NPA classification for infrastructure and non-infrastructure loans.
  7. Each bank must focus on their respective top 30 stressed Accounts involving those categorized as "willful defaulters" and make their names public. Such a step will act as a deterrent for other promoters against wilful defaults.
  8. It will also enable banks to withstand pressure and interference from various quarters in dealing with the promoters for recoveries or sanctioning further loans. On the other hand, promoters will also be cautious before applying for loans. The Committee are of the view that when companies, which have undergone restructuring process for their stressed loans, should be made public, there cannot be any justification for maintaining secrecy on this count.
  9. RBI to monitor and follow it up with the banks and financial institutions on a regular basis till concrete outcomes materialise. Such a pro-active action by RBI will also enable it to review the guidelines, whenever required and plug loopholes, if any. As the Committee would not like the RBI to be a passive regulator, when major lapses occur in banks, it would be in the fitness of things if RBI exercises its regulatory powers vis- a-vis banks to take punitive action in cases of default and to enforce their guidelines. The Committee also believe that RBI as a regulator should have its regulatory role well delineated and thus not have its Director in the Board(s) of the Banks as part of their management, as conflict of interest may lead to avoidable laxity.
  10. Forensic audit of such loans (restructured loans becoming bad debts) as well as willful defaults be immediately undertaken.
  11. Appropriate system should be evolved and guidelines be prepared to take charge of assets and management of such failed CDR companies, while initiating action against such management. Further, disposal of the assets should be given priority.
  12. Considering the non-efficacy of the CDR mechanism, the Committee believes that the RBI's scheme for Strategic Debt Restructuring (SDR), which empowers banks to take control of defaulting entity and its assets by converting loan into equity, may armor the banks with an additional tool to cope with their NPAs. A change in management must be made mandatory in such cases involving willful default or sheer inability on the part of the promoters, where they have diverted funds and no redemption is possible. The Committee would however like to put a caveat here that the SDR mechanism should be used sparingly so that it does not become a smoke screen for large scale write-offs. It is necessary that even after SDR, the penal consequences for a wilful defaulter should continue to operate.
  13. Bulk of bad loans may be linked to firms that are struck with over-capacity and weak demand and are, therefore, simply unable to service their debt. The prolonged slowdown in the economy has eroded the market for distressed assets so much so that even Asset Reconstruction Companies (ARCs) have found it hard to off load them. The Committee would, however, still suggest that the RBI should consider such a dispensation that allows banks to absorb their write-off losses in a staggered manner, can help them restore their balance sheets to their normal health, while ridding the banking sector of its toxicity.
  14. Time-bound disposal of cases thus becomes the need of the hour. A distinction now needs to be drawn between "wilful defaulters" and other defaulters in the procedures prescribed under the relevant Acts and accordingly, "willfully defaulting" promoters must be dealt with sternly and promptly. Banks must be fully empowered to recover their dues promptly after necessary orders are passed by the Tribunal. The Committee would strongly recommend a thorough overhaul of the legal regime governing debt recovery, which may include stringent provisions to safeguard public money. Furthermore, there is a need for authentic and large Credit data base including posting the Credit Status of "wilful defaulters" in public domain.

For full report refer www.prsindia.org. or  savepublicsector.com  

Out of these recommendations, not even one has been implemented so far. Is the Govt not even accountable to the Parliament? Whom are we trying to cheat talking about bad banks in a bad taste. Who will provide capital for bad banks and it is going to help whom? It is high time we wake up the Govt and talk about good governance and not bad banks.

* Thomas Franco (

The economy anarchy of capitalist society as it exists today is, in my opinion, the real source of the evil. Private Capital tends to be concentrated in few hands..(resulting in) an oligarchy of private capital, the enormous power of which cannot be effectively checked even by a democratically organised political society. – Albert Einstein.




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