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Narendra Modi speech: Yes, NPAs are making of Congress-era, but isn’t it time PM moved past ghosts of UPA?

Narendra Modi hit hard at erstwhile Congress-led UPA regime in Parliament for the NPA (non-performing assets) mess in the banking system.

It’s entirely the creation of the UPA-government, Modi said. This wasn’t the first time the PM launched heavy attack on UPA on the bad loan issue. At a recent event organised by Federation of Indian Chambers of Commerce and Industries (FICCI), Modi made nothing less than a political speech targeting the UPA for bad loans.

Modi then called it a ‘scam’ even bigger than those linked to the Commonwealth Games, 2G telecom spectrum allocation and coal block allocation and alleged that banks were under pressure to give loans to select industrialists during the UPA-regime.

As this writer pointed out in an earlier column, Modi has a fair point here.

When it comes to the bank NPA mess, the Congress party finds itself on the wrong side of the debate. It was under this government, all the problematic loans happened. Public sector banks were let loose to balloon their corporate loan books as they pleased.

Intense competition from rival banks and influence of corporate-political nexus prompted India’s public sector lenders to resort to careless lending blissfully forgetting the golden rules of the game i.e. make sure the borrower has enough means or assets to pay back money in the event of a business failure.

File image of Prime Minister Narendra Modi. Reuters.

File image of Prime Minister Narendra Modi. Reuters.

Vijay Mallya’s happened in this era of imprudent lending. Besides the corporate loans, these lenders were used as perpetual instruments to carry out government schemes and push directed lending to farm sector (which continues even now).

One of the two major reasons for NPA crisis in the banking sector is the large-scale involvement of corporate-political nexus during the UPA-years (the other, of course, is the economic downturn that caught bankers off-guard after the boom years).

In 2010, the Central Bureau of Investigation (CBI), busted a corporate loan racket. In the Kingfisher-Vijay Mallya case too, where bankers are still waiting for the repayment of Rs 9,000 crore from the grounded airline, there were allegations of political involvement in aiding the private airline stay afloat.

There are countless examples at various levels, where political-corporate nexus worked in full swing during the UPA-years to put pressure on state-run banks to extend loans to unworthy borrowers. In this context, the Congress's attack on the Modi government for favouring few large corporations -- this was one of its key points in the Gujarat election as well -- and the current NPA problem lacks credibility given the fact that the mess was created during its term.

The corporate loan book of Indian banks grew to Rs 26.6 lakh crore in 2014 from Rs 4.27 lakh crore in 2004-05. From 2014 to 2017, the portfolio almost remained stagnant at Rs 26.8 lakh crore.

This basically means that loan growth to industries was almost nil during Modi-government’s years. The NPAs of banks was at Rs 2.61 lakh crore when Modi took over but jumped to Rs 8.4 lakh crore at the end of September 2017.

This was after the bad loan clean-up by the RBI began in 2015 and banks were forced to bring out hidden NPAs that caused a sudden spike in the NPA figures. On the other hand, the Modi government has made notable progress in addressing the bank NPA problem by legislating the insolvency act and giving more tooth to the Reserve Bank of India (RBI).

The government has also worked out a smart recapitalisation plan (Rs 2.11 lakh crore) to fill the huge funding gaps of government banks. Results are beginning to show although it is too early to say that this alone will address the ills of the sector.

In the long-term, privatising most of these banks will be the only solution (retaining a few large ones under government control) to avoid a repeat of the current banking sector crisis.

In fact, the Modi government woke up too late to address the banking problem. In the initial years, it didn’t pay much attention to the capital needs of the state-run banks or kick off radical reforms to address the systemic problems in the sector.

The RBI began action on the NPA problem in 2015 when it spelt out stricter rules to banks on early recognition of assets and punitive provisioning rules for the lenders who do not go for swift resolution of problematic assets.

As mentioned earlier, the Congress party is on a weak ground when it comes to the issue of build-up of bank NPAs. However, the Congress party is no longer in power, but the Modi government is.

Sometime back Modi had called Indira Gandhi’s bank nationalisation a big drama that never benefitted the poor. If that is the case, as this writer argued before, there is no reason why Modi can’t undo that drama.

In the case of NPAs also, nothing prevents Modi, who holds the most powerful constitutional office, from initiating a thorough probe to dig out the dirt from all past suspicious corporate bank loan deals and put the guilty behind bars.

Undoubtedly, along with political offices, bankers too were involved in this mess either by accepting bribes from the beneficiaries or out of fear for powerful politicians. Except in a very few cases, no banker has been arrested for flouting norms to give loans and made answerable for past actions.

If Modi thinks bank NPA is a bigger scam, here again, this is his big chance to bring the schemers and scamsters behind the bars. Coming back to Modi’s latest Parliament speech, UPA doesn’t have a strong counter argument to Modi if he calls it the maker of NPAs.

But, that is a known fact. After nearly 4-years of Modi-government in office, it makes no sense beyond serving the political purpose to continue blaming the old regime. Modi should move past the UPA-era and continue focusing on resolutions. The first among them, as experts have repeated in the past, is to free the state-run banks from the state-run character and let private sector take over.

(Part of this piece was published earlier)


Published Date: Feb 09, 2018 11:41 AM | Updated Date: Feb 09, 2018 11:47 AM

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