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NPAs

An Interminable Saga of National Loot

On 3rd of March, most newspapers across the country screamed “Mallya escapes”, leaving the entire Indian banking industry in lurch with Rs 9000 crores in outstanding bank loans and interest dues generally called as NPA.

Suddenly NPA became central to all socio-political discourse across the country. To a banker, NPA or Non Performing Assets represents a loan which has stopped earning interest to the lending bank.  We all know, in life there is nothing free. So if you have borrowed, you have to pay the borrowed money plus the agreed amount of interest. Thus, the interest becomes a cost to the borrower, while to the bank, it is a revenue or income.

Why does a bank loan become an NPA? A borrower agrees to a programme of repayment of loan - principal + interest, a schedule of liquidation of borrowed money with interest. Many a time, it may not be possible to keep the schedule and it can remain outstanding for a period beyond say, 3 months, 6 months, 12 months etc. Then many banks, depending on the genuineness of the reasons for default in repayment, try to reschedule these outstandings, sometime by increasing the limits of borrowing, which is always outstanding principal + outstanding interest. Of course, there are cases where no rescheduling is agreed for varieties of reasons, like, assessment by the bank that the borrower is not able to manage the project or borrower has lost the trust of the bank or borrower has diverted the funds for purposes other than the original purpose of the loan, or diverted the funds for personal purposes.  Rescheduling also can take place looking into the future prospects of the borrower’s project and genuineness of the reasons for default in repayment, unholy nexus between the bank management and the borrower for unwritten reasons etc.. There are allegations of kickbacks to the top management of Banks for agreeing to rescheduling the loans also.  These rescheduling are basically window dressing, or ever-greening or evading provisioning for bad and doubtful debts.

Now having dealt with this latest monster called NPA, what we need to know is, how NPA was allowed to become a monster. Available information in the public space tells us, it is to the tune of some 4.5 lakh crores of rupees. Mind you, this is after periodic write offs which would again run into lakhs of crores of rupees over a period of many years. During the last three years alone, reportedly Rs. 1,14,000 crores have been written off  by PSBs. Again this 4.5 lakh crores, presently being shown as NPA, may eventually be written off as bad debt either partly or fully. The question is whose money is it being written off? It is the nation’s resource, if available, could have been used for funding essential developmental projects. There may be genuine reasons too among the number of controversial reasons for default in repayment by the   borrowers.  Of course, business is always risk driven. There is no business without any risk, unless it is a monopoly or State supported enterprise. In a competitive environment, risk is a factor that is ever present. Hence, there are all possibilities that there could be loss. But do we have any loss analysis prior to the decision to write off a loan (principal and interest)?

Is there a mechanism to fix responsibility at the door of the borrower, as to how this loss could have been avoided or was it unavoidable? Or were there any flaw in the appraisal of the loan by the bank official while assessing the repayment capacity of the borrower?  Were there any misrepresentation by the borrower in the financials of the project viability?  Whether the assets offered as security are sufficient, marketable and free from outside claims? Whether there is any mechanism to protect banks in such situations?  Hence, question of accountability on the part of both the lender and the borrower is of paramount importance. But has this importance been given to this issue of concern, is a point lost in the chaotic discussion on NPAs.

In banking sector, there are both private sector and public sector players in India. A comparison between both private lenders and public sector banks shows that the NPAs of private sector banks are far smaller as compared to public sector banks. Is it because the accountability in private sector banks is far stricter than that of public sector banks? Is it the “chalta hai” attitude in PSBs? According to a policy watcher, “Private sector banks appear to have weathered the financial turbulence much better than PSBs. They appear to have managed their provisioning with greater due diligence. More importantly they have disbursed loans with lot more prudence. Financial prudence, after all, is supposed to be the bed rock on which banking structures are built. Somehow, many PSBs forgot this” he opined. “Private banks penalize managers who overstep prudential norms. A good example is the manner in which a foreign bank eased out three of its very top managers for over-exposure to a leading Indian industry house. One seldom sees such penalties being imposed on defaulting PSB managers.” He added.   

We all recognize that every loan proposal gets considered on the basis of its repayment capacity, gestation period and future viability. There are set guidelines for appraisal of the loan proposal like the history of the borrower, feedback from other financial players, past financials like Balance Sheet and Profit and Loss account etc., creation of assets by the borrower and borrowers’ stake in the project like the funds and assets brought in by promoters involved. It’s fairly straight forward and no complexity of a rocket science. Thus, it is possible to make a prudent assessment of the need for external funding, quantum of external funding and the gestation period of its operation and eventually how, the completed and operating project, could meet its financial needs and leave a surplus to pay to the funding institutions.

So what really went wrong with Vijaya Mallya & his companies and all those who add up to Rs. 4.5 lakh crores of rupees? 

Every Bank is required to frame its credit policy under which the powers are delegated to different levels of authority including Board of Directors for dispensation of credit.  For example, “A” Bank may decide that large advances, say Rs.100 crores and above could be sanctioned only by the Board.  All the sanction of loans are subject to RBI directives.  During the 90s, RBI came with a direction that the power to sanction loans by the Board could be delegated to a Committee of the Board (called Management Committee) consisting of RBI and Ministry Directors besides CMD, ED and other non-executive Directors nominated to the Committee on a rotation basis every six months. Only the minutes of the Committee are placed before the Board and those members of the Management Committee would be privy to the vital information on the credit sanctioned by the Committee. Whatever NPAs we are talking about in the industry today are all sanctioned at the highest levels.  It is an irony that the regulator, the RBI and the owner, Government of India (MoF) had their representatives on the Board and Management Committees and how such dubious loans (which have become NPA today) got sanctioned without any questions raised by these watchdogs points to the allegation of corporate-political nexus. The suspicion gets strengthened with the clout certain industry groups enjoy with the establishment.  It is well known fact in the industry that the selection to the posts of CMD and ED are made in a opaque manner and it is believed that the candidates who have close connections with these groups get selected (even by relaxing the eligibility criteria).  A few years back the Mangalore Head quartered PSB, Corporation Bank had a CMD appointed, who had only 13 months of service left! Once the candidates are posted, these groups put pressure on these top executives to return the favours which also have contributed to the NPA mess.

An ordinary customer goes for a personal or housing loan, he will be required to provide collateral security besides mortgage of the assets to get the loan.  But in case of corporates, crores of rupees are sanctioned taking the land and building and machinery and inventories, all at inflated values as security. Over the years RBI had also dispensed with mandatory obtention of personal guarantee of Promoter Directors which has further helped the unscrupulous corporates to get loans without any fear and accountability.  During the 2000s, RBI also permitted Banks to sanction short term loans (less than 1 year) to corporates beyond the consortium. This also helped the corporates to avail crores of short term loans at concessional rates from Banks many of which today have turned NPAs.

Here it is relevant to quote Mr. Anil Sinha, the CBI director. He was speaking at the 7th conference of CBI &IBA (Indian Banks Association) on 2nd March 2016, in Mumbai. 

Quote: “During the last six years, gross NPA in PSBs have gone up from Rs 44357 crores in 2009 to Rs 3 lakh crores in 2015. The level of gross NPAs as % of gross advances has also gone up from 2% in 2009 to 4.36% in 2015. And we are not even considering huge amounts tied-up in accounts under restructuring. There is also a rise in quantum of high value frauds in borrower a/cs. There is also rising trend in case of bank frauds and financial crimes taken up by the CBI. The crisis in the banking and financial system runs deep and there is a growing sense of anguish among the public that while banks are strict on retail borrowers, the big borrowers and large scale fraudsters are able to not only evade the law but enjoy the fruits of their crime. Something is indeed seriously wrong. While I fully understand that loan defaults can happen due to business risk and & reasons beyond the control of banks, borrowers & regulators, yet a significant part of the defaults are willful & fraudulent. What causes concern is that a major part of the NPAs & frauds are in large value accounts. Added to this is the unduly slow & long process by which such loans & advances are red flagged, declared NDAs, then as willful defaulters & finally as fraudulent. This whole process is so time consuming that it allows large borrowers ample time to walk away with funds, including hawala to tax havens. As a result of these limitations, investigations by CBI are grossly hampered. The accountability mechanism in banks & financial institutions are weak & defused. In the end no one seems accountable. The message to the public is that rich and powerful are able to avoid consequences of cheating and fraud, while the ordinary citizens are promptly booked. This undermines faith of people in rule of law which has dangerous consequences in democracy. CBI has recently registered a case of cheating & fraud against Kingfisher involving allegations of defrauding banks to the tune of nearly Rs 7000 crores.

This case was registered in July 2015, for loans of 2004 to 2012. However despite our repeated requests, the banks did not file a complaint with CBI. We had registered the case at our own initiative. The question is, that undue delay in identifying and reporting such a fraud has jeopardized the cause of justice to the offenders’ benefit giving them opportunity to divert funds and destroy evidence. All of us must ponder over this issue”. Unquote. 

Right enough SBI, the lead banker to King Fisher loan, filed application with DRT only after Vijay Mallya fled, seeking to arrest him and impounding his passport.      

The RBI conducts Annual Financial Inspection (AFI) in every Bank and how these NPA loans skipped RBI investigation is a big surprise. Further, it is the RBI which  encouraged postponing the NPA problem in the name of loan restructuring and Corporate Debt Restructuring under which the corporates have been given huge concessions in interest and other charges which if investigated would bring out another scam.

RBI’s data shows that industrial players accounted for 55% of NPA while accounting for only 10% of employment generation. Compared to this agri-sector accounts for 50% employment generation while accounting for less than 8% NPAs. Still a hue and cry is made when farm loans are written off by the same industry barrons who have looted the banks while lakhs of crores of corporate loans are written off without any questions asked. This is a reflection on the State priorities for all post independent years.   

Today all of a sudden the RBI wants to clean up the Banks in the name of AQR (Asset Quality Review) which is claimed to be one shot remedy for the ills of the banking industry and the PSBs are forced to swallow the bitter pill as they had ventured into the above mentioned projects under compulsion and without necessary skills.

Kingfisher Effect:

The actions taken to recover the money from Kingfisher have created ripples in the corporate sector and will have a lasting effect if the judiciary of the country, the only hope for the people, has its way.  Thanks to the media which is active, the masses in the country have come to know about the private loot of public resources through its nexus with the powers. The judiciary has proved that none is above the law through its demonstrative actions against Mr. Subroto Roy (Sahara Group Chairman) for defaulting repayment of deposits to the depositors and now the Kingfisher CMD, Mr. Vijay Mallya. 

While it has to be understood that all NPA borrowers are not willful defaulters, those closely associated with the industry know that Kingfisher is only the tip of the ice berg. It is reported that corporates like Bhushan Steels, Essar Group etc. are in the list of NPA defaulters who have borrowed tens of thousands of crores from PSBs which are hard to recover as they had inflated project costs and had not created commensurate assets resulting in steep erosion in value of securities. It is hoped that the Government should show its resolve in helping PSBs to recover the public money from these unscrupulous corporates.  Continued media attention and judicial scrutiny will help the Banks to recover the public money from these corporates who have manipulated the entire system to loot the public money for their private gain. 

What the Government can do?

The Government can take the following steps to help the recovery of public money:

1. Strengthen recovery mechanism like DRT (Debt Recovery Tribunal) and SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) by giving teeth to the laws and make recovery process faster and less time consuming.

2. Conduct forensic audit of all NPAs which are say, more than Rs.500 crores and punish those responsible for throwing public money in the hands of money launderers and cheats

3. Amend IPC to make willful default a cognizable offence with stern punishment 

4. Amend Banking Secrecy Law and publish the name of willful defaulters 

5. Bar promoters and full time Directors of companies (which are willful defaulters) from holding public offices.

6. Adopt a policy to recover the concessions extended to corporates under CDR (Corporate Debt Restructuring) and other restructuring schemes, once the company starts making profits.

7. Wherever securities are enough to recover, stop selling NPAs to ARCs at throw away price. 

8. External Audit of write off of loans as it involves loss of public money.

9. Give autonomy (real) to Bank Boards and stop micro management of Banks

However it is to the credit of the present government that as far back as May 2015, almost an year earlier, had initiated steps to check loan frauds, having already collected comprehensive data on willful defaulters of public sector banks. A Central Fraud Registry (CFR) under RBI is planned. A concept of Red Flagged Account (RFA) has already been introduced, to pre-empt attempt at fraud. Any RFA designated a/c will not be allowed restructuring or additional funding. Finance ministry, while acknowledging NPAs to be at unacceptable levels did acknowledge huge NPAs were due to indiscretion, inaction so also due to challenges.   

Hope the Government would prove its resolve to fight the NPA menace through its actions in the days ahead.

J. Shriyan with inputs from D.N Prakash, a former Vice President of All India Bank Officers' Confederation.