How not to write off a loan

India’s Non-Performing Assets, or NPAs, the official term for loans that have gone bad, are of the order of nine lakh crore rupees. The precise gross NPAs figure reported by the RBI was a closing balance of Rs. 8,99,803 crores for 2019-20, which was 8.2% of gross advances for 2019-20, and 6.8% as of December 2020. To compare, NPAs were 1.1% for the UK and 0.9% for the US (2018/19 figures). The gross NPAs came post write offs totaling Rs. 2,37,876 crores during the year, without which the NPAs would be Rs. 11.38 lakh crores.

Bankers strain to explain, quite correctly, that NPAs are an inherent part of the banking business. All banks must grow their loan books, all loans carry a risk, and some of that risk will come to bite. As long as a very small number of loan decisions go bad, it is business as usual. That comfort was long crossed in India. Now, even the cleaning up operation, a part of which is recognising the risk, showing it as such on the books and going for recovery, is looking worse than the disease.

The roots of this of course go back to the days of exuberance and madness during which banks chased people for loans, waiting to hand off crores if only you could submit some phony paper project for the files. This was a loan mela for the rich and the connected.

What is one to make of the reported deal with the Chennai-based Siva Industries and Holdings Ltd, which has dues of Rs. 4,863 crores. Banks, led by the IDBI Bank, have now approved a settlement under which the company will pay Rs. 318 crores, or 6.5% of the total outstanding. This amount will be paid back later, in 180 days, with just Rs. 5 crores to be paid now. In other words, the borrower is a free bird by paying 0.1% upfront on a loan outstanding well beyond its due date. To achieve this “recovery”, insolvency proceedings will be withdrawn, so the company stays, the promoters stay, the loan is cleaned up and it’s back to business. Reports later said some Rs. 555 crores will be recovered from third-party guarantors as part of the settlement terms. A final order from the National Company Law Tribunal, which has asked some tough questions in the case, is awaited.

One of the arguments offered in favour of the settlement is that any other option would be worse for the banks – get something instead of nothing. The arguments and the situation tell us of the trap that all banks are in, a true reflection of what was thought to be an amusing quote but is a painful reality in the India of today: If you owe the bank a 100, that's your problem. If you owe the bank a 100 million, that's the bank's problem.

Each loan settled poorly is a message to a hundred others to do the same.

Consider the case of Lanco Infratech Limited, which owed Punjab & Sind Bank Rs. 215.17 crore, and has now being moved from an NPA account to a fraud. The case was reported to the Bombay Stock Exchange last week (June 16). The company owes more than Rs 44,000 crore to an IDBI Bank-led lenders' consortium; it was among the first to be listed for insolvency proceedings.

Cases like these may well defame and possibly derail the elaborate process set up under the insolvency and bankruptcy code. It erodes confidence in a system that is already facing a crisis; it biases the banking system in favour of a settlement, however bad the deal for the banks. It allows suspected criminal violations to go uninvestigated and unpunished, and gets into a complex mechanism for loan settlements with an army of consultants and advisers who will soon know how to play the system. Dirty deals can’t be cleaned up this way.

RBI data shows that frauds in general totaled Rs.1.38 lakh crore in 2020-21, with 99% of these frauds being related to advances.

RBI data shows that frauds in general totaled Rs.1.38 lakh crore in 2020-21, with 99% of these frauds being related to advances. To quote the RBI Annual Report released on May 24, 2021, fraud cases related to advances were Rs. 1,37,023 crores against a total of Rs. 138,422 crores during 2020-21. This suggests that 10% of NPAs are cases of frauds, roughly, not to forget that it takes long for a fraud to be detected in the first place. These official numbers reflect only a part of the reality. Note that the RBI reports the average time lag between the date of occurrence of frauds and the date of detection at 23 months.

The two cases cited here and in the news are but an illustration of all that is wrong with the way the banking system is run in India. The roots of this of course go back to the days of exuberance and madness during which banks chased people for loans, waiting to hand off crores if only you could submit some phony paper project for the files. This was a loan mela for the rich and the connected. The description is not some wild exaggeration. In the words of the former RBI governor Raghuram Rajan: “One promoter told me about how he was pursued then by banks waving cheque books, asking him to name the amount he wanted…Too many loans were made to well-connected promoters who have a history of defaulting on their loans.”  

Even the cleaning up operation, a part of which is recognising the risk, showing it as such on the books and going for recovery, is looking worse than the disease.

Today, the way settlements are sought to be signed tells us that we may be entering the age of settlement mania. The well connected continue to exploit, the supervisory and regulatory system isn’t ready to crack the whip and the money of the people of India is being written off to a host of accounts that may well be the modern version of daylight dacoits who walk away without being held to account. Each loan settled poorly is a message to a hundred others to do the same.  Every individual who is not pursued, not held to account and not sent to jail for playing the money of ordinary citizens in cases of criminal violation encourages others to do the same.

It is true that businesses can go bad and we must make an allowance for that, lest we’ll have no growth, no entrepreneurs and no businesses left. But businesses will also have to be cleaned up so that gold plating of projects is punished, so that companies are not bled for personal profits and managements are held to account for the way they deploys the funds. The end use of public funds must be monitored with a hawk eye when those funds come from the people of India.

Businesses will also have to be cleaned up so that gold plating of projects is punished, so that companies are not bled for personal profits and managements are held to account for the way they deploys the funds. The end use of public funds must be monitored with a hawk eye when those funds come from the people of India.

This does not require more professional qualifications or financial wizards. It calls for political courage to send the right message – a message that will be difficult for a government that has so far come up as less caring for people, notably the poor and the downtrodden, and is aligned more to the demands of business.  Witness the way in which labour laws and basic protections they offer were sought to be suspended just when labourers were caught in the midst of a pandemic and a harsh lock-down that set them on foot, penniless and walking hundreds of miles to their village homes.

In the world of high finance, this connection between the weakest and the poorest, and the mightiest and the most funded is lost. The root of the crisis is the belief that growth is achieved because businesses drive the GDP and the welfare of ordinary citizens can be sacrificed at the altar of this top-down growth. If these are the lopsided terms on which we settle overdue loans, then it won’t take long for one-time settlements to be seen as a new source of scams.

(The author is a journalist and a faculty member at SPJIMR. Views are personal)