Former CVC is right: There is a cancerous growth in Indian banks - hidden NPAs

The problem with the cancer is, if left undetected, it lives merrily with the victim for a considerably long period, before manifesting one day with its full might

Dinesh Unnikrishnan October 04, 2014 15:33:04 IST
Former CVC is right: There is a cancerous growth in Indian banks - hidden NPAs

The comments of former central vigilance commissioner (CVC) that state-run banks were probably suppressing the bad loans on their books by restructuring these loans with easier conditions is highly critical and gives a hint on how frightening the actual bad loan situation can be in India's banking system.

"NPAs (non-performing assets) are getting suppressed-the RBI(Reserve Bank of India) has taken note of it," said Pradeep Kumar, former CVC, in an interview with Time of India on Friday.

What Kumar said is something which every stakeholder in the banking system - the bankers, the companies, the regulator and the finance ministry (which effectively controls 70 percent of the banking industry through public sector banks) knows very well for long, but has conveniently ignored for their own interests.

For several years now, the banking industry, in particular state-run banks, have been subjected to severe, frequent misuse by a nexus of crony capitalists, corrupt bankers, middlemen and politicians.

This typically happened in two stages.

First is when the loan is being sanctioned. The nexus is at work then in the case of companies, which originally didn't merit the loan. The banker is bribed or influenced by the politician or the firm through the expert middleman, who seal the deal for the beneficiaries.

This happens typically in state-run banks, where officials lack accountability, power, autonomy in their functions and are prone to flouting rules when bribed or pressurized by those with money power.

Logically, a company which secures the loan through this mechanism wouldn't be able to honor its repayment obligations for long since in the first place, the firm didn't deserve the loan. If it did, there was no need to trigger the nexus to operate.

Two, when the crores of money thus lent and not repaid by the unworthy borrower are about to turn an NPA, the nexus again returns to work and push the banks to offer additional assistance/ relaxation to the same faulty borrower through some easier terms (slashing lending rates, extending repayment period, offering a moratorium and taking a haircut), commonly known as loan restructuring.

This is something, again, the company doesn't deserve, since loan recast facility is originally intended for companies in genuine trouble not cronies.

As Firstbiz has argued in the past (here and here), there are strong reasons to believe that a sizeable chunk of the current stressed asset mess is attributable to criminals in the banking system.

If one take a closer look at the major bad loan cases that have been now investigated for charges of wilful defaulting/ criminality/ fraud such as Rs 7,000 crore loan owed by Vijay Mallya-led Kingfisher Airlines, Rs 6,500 crore loan of Winsome Diamonds and Rs 40,000 crore of Bhushan Steel, Rs 2,500 crore loan owed by Mumbai-based Tayals and several other similar cases, one needn't take much effort to understand how the current pile of publicly stated bad/ restructured loan happened.

Bankers have been well aware of several cases going into loan recasts without merit but kept silent until recent past for fear of their jobs and for the sake of their own career development/ post-pension vocation programmes.

A change in this scenario happened only in the last 2-3 years, when the lead lenders at the corporate debt restructuring (CDR) forum took up the issue with the RBI seeking change in rules to prevent companies from misusing the system.

But that's about companies. What about banks themselves misusing credit recast facility to rescue a non-meritorious firm? That's what the former CVC has highlighted now.

If indeed banks were honest in stating the actual status of many of their loan accounts and showed the guts to call a spade a spade, the actual figure of bad loans would have been much higher than the Rs 2.5 lakh crore gross NPAs disclosed by them till June.

As RBI governor Raghuram Rajan said in the post monetary policy presser on last Tuesday, banks shouldn't postpone the bad loan problem for tomorrow and instead deal with it today, because "tomorrow will be worse".

But that's precisely what banks have done all these years. The total chunk of loans restructured in the banking system is about Rs6 lakh crore (Rs 3 lakh crore through CDR and the rest through bilateral route).

Only a thorough investigation can reveal how much of this chunk is actually hidden NPAs. Identifying the problem is critical to find remedies. A Firstbiz estimate shows about 14 percent of the loans given by banks until June is under the stressed asset category. That's not a good signal for an aspiring economy like India.

Bad loans make banks weak. If banks fail to detect or pretend not to have them on their books, that can be even more fatal for the whole economy at a later stage. Banks are the backbone of an economy and the managers of public money. Hence, safeguarding them should be the utmost priority of the policymakers.

As Firstbiz noted earlier, the only way out to come out of the current situation plaguing India's private sector banks is to privatise them and change them as better governed institutions.

Putting good money after bad and understating the financial health do not often happen in private sector banks like in the case of state-run lenders.

Hidden bad loans are like cancer. The problem with the cancer is, if left undetected, it lives merrily with the victim for a considerably long period, before manifesting one day with its full might.

That day comes with a cost.

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