THE DISEASE OF RISING NPAs - INDIA INC IS THE CAUSE

By Ruma Dubey

You dare miss one payment on your EMI?  It could be a payment of something as small as Rs.3000. Life could become hell!  Penalties, poor credit score and difficulty in getting loans the next time; the troubles will follow you into your grave and beyond.  That’s the story of our life; we the ‘mango’ people.

But if you are Vijay Mallya or Reddy of Deccan, you can pretty much get away with murder even though the loan default amount could be running in thousands of crores. Mallya did not pay salaries, he defaulted on loan and interest payments on several occasions and is sitting on debt of over $1 billion. Yet, he is scot free, the lenders have almost reluctantly, after so many months decided to sell the KFA HQs in Mumbai and realise at least some of the money. But this is after banks kept on lending him more money despite knowing that he was defaulting, allowed good money to chase bad money and ultimately now all threatens to become bad.

Banks are today staring hard at huge Non-performing Assets (NPAs) or bad loans. Take a look at some of the NPAs reported by banks in current Q1FY14 (comparison is YoY). And it is pretty apparent that the pain is more in state run PSU banks. SBI alone accounts for almost one-third of gross NPA of all listed banks put together.

PNB - Gross NPA rose to 4.84% v/s 3.34% and Net NPA ballooned to 2.98% v/s 1.68%

Allahabad Bank - Gross NPA ratio at 4.78% v/s 1.96% and Net NPA at 3.87% v/s 1.09%

State Bank of India - Gross NPA ratio at 5.56% v/s 4.99% and Net NPA at 2.83% v/s 2.22%

Dhanlakshmi Bank -  Gross NPA ratio at 5.78% v/s 1.39% and Net NPA at 4.10% v/s 0.72%

Lakshmi Vilas Bank - Gross NPA ratio at 5.27% v/s 3.58% and Net NPA at 3.74% v/s 2.21%

Indusind Bank - Gross NPA ratio at 1.06% v/s 0.97% and Net NPA at 0.21% v/s 0.27%

Yes Bank - Gross NPA ratio at 0.22% v/s 0.28% and Net NPA at 0.03% v/s 0.06%

Standard & Poor’s has put out a report on the rising NPAs on the Indian banking sector and expects bad loans to swell to 3.9% of total loans in FY14 and to 4.4% in FY15. RoA for the sector is also expected to remain depressed at around 0.9%.

Another newspaper, Live Mint put out a report, analyzing Q1 earnings of 35 listed banks and stated that Gross NPAs of 22 PSU banks rose 51% (YoY) at Rs.1.2 trillion and up 15% sequentially. More shocking is the finding that banks have totally restructured more than Rs.2.5 trillion of loans under the corporate debt restructuring (CDR) mechanism. And this CDR cell is only expected to get super busy, getting inundated with more restructuring requests. In FY 2013, banks restructured Rs 75,000 crore loans under the CDR mechanism, which was nearly double the level in the previous fiscal. And there are reports suggesting that many of these restructured assets could also turn into bad loans this fiscal, with gross NPAs soaring to 5% of the system.

Aren’t these facts all pointing towards the truth that the corporate sector is indeed responsible for a major part of the rising bad loans causing inconveniences to the honest borrowers. Yes, NPA is a creation of the corporate sector where they borrow and do not pay on time.

If you and me go to the bank and ask for a loan of Rs.10 crore, from PSU banks, what is the likelihood of getting it? Zero or maybe roughly 4-5% of the teeming 1 billion populations might be able to get. And these will be individuals who would be well connected and already rich. If they default? Well, the same connections help them get another loan or get the loan restructured. So basically, banks do not have the courage to bring such fraudsters to task as they fear trouble from these ‘connections’. So does it all, ultimately boil down to being well connected and you can get away with anything?

So why do we have these hypocrisy in banking? While a small individual, for a smaller loan, is punished hard and long, the bigger fraudsters, are not only allowed to default, but they are granted more loans despite a pathetic credit history. Forget arresting, their personal properties are not ever attached. And we cannot know the names of the defaulters because RBI has refused to divulge the names of the defaulters against whom no suits have been filed, citing secrecy clauses. And these corporate honchos have today burdened the entire banking system and made healthy banks into debt holes. Aren’t they economic terrorists’?

Bad loans cannot be blamed entirely on high interest rates and lower economic growth. Banks are to be blamed because when it comes to big companies, they have no verification process of end use of the funds, poor assessment and a meaningless recovery process. Banks, as per the rule book, can get a representation on the Board of the borrower firm but how many banks have actually exercised that rule?

This secrecy clause, protecting the names of defaulters should be first done away with. Transparency begins right from there. Yes, the list of names would include those of highly connected people, politicians. And that is the reason why we have this secrecy.