Narendra Modi is right in calling NPA mess UPA’s child; but if it is a scam, guilty should be jailed

At a recent event organized by Federation of Indian Chambers of Commerce and Industries (FICCI), Prime Minister Narendra Modi made nothing less than a political speech targeting the Congress-led UPA regime. The speech appeared more like a continuation of the Gujarat political battle call, rather than a routine address at an industry gathering. Among the major charges Modi raised against the UPA-regime was the build-up of the big NPA mess. Alleging that banks were under pressure to give loans to select industrialists during the UPA-regime, Modi called it a bigger scam than those linked to the Commonwealth Games, 2G telecom spectrum allocation and coal block allocation scams.

Modi is right here. When it comes to the bank NPA mess, the Congress party is indeed on a weak ground. The UPA-regime will have to take much of the blame for the kind of bad loan addition in state-run banks that happened during  UPA-I and II when the government banks completely forgot about prudent lending to worthy borrowers and found themselves vulnerable to the infamous corporate-political nexus. One of the two major reasons for the banking sector NPA crisis 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 (read a Mint report here ). 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.

File image of Prime Minister Narendra Modi. Reuters

File image of Prime Minister Narendra Modi. Reuters

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 is 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 too woke up 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.

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Updated Date: Dec 15, 2017 09:09 AM

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