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Regular write off of bad loans by banks are a big drain on the economy

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Bad loans amounting to  Rs 6.32 lakh crores have been written off by 12 nationalized banks over the past eight years.  The 12 lenders include the State Bank of India (SBI), Bank of Baroda (BoB), Bank of Maharashtra (BoM), Union Bank of India (UBI), IDBI Bank, Punjab National Bank (PNB), Indian Overseas Bank (IOB), Central Bank of India, Canara Bank, UCO Bank, Indian Bank and Bank of India (BoI). Of these banks, IDBI bank has since become a private bank after LIC increased its stake in the bank to 51%.

Vivek Valankar, an RTI activist from Pune, writing in a piece published by Moneylife News & Views, on 30 Nov 2020,  says that this information was collected by him from SBI, BoB, and BoM in their shareholder meetings as he was holding shares in these banks. The other banks when approached by him using RTI queries, declined to provide the information, saying that it was extractable from their annual reports available on their websites. As per the information submitted by him, the 12 banks had recovered only Rs 1.08 Lakh crores and written off 6,32 lakh crores in the same period.

Out of this Rs 6.32  Lakh crores written off, 44% or Rs 2.78 Lakh Crores came from big defaulters with borrowings of Rs 100 Crores and above.

The normally followed approach of writing off bad loan amounts (since there is no real hope of recovery), while looking practical, has only been helping defaulters, and the concepts of confidentiality and fiduciary relation further protect defaulters by blocking their identities from the public. When such a grant of loans followed by a writeoff of the defaults remains constant,  the possibility of active collusion by insiders or influential persons arises and additionally encourages the practice, embedding it deep into our financial system.

According to Sucheta Dalal, writing for the Moneylife Digital Team,  on  18 Jul 2020, CH Venkatachalam, general secretary of All India Bank Employees Association (AIBEA), observed that the alarming increase in bad loans is a major problem faced by the Indian Banking Industry.

He observed that the initiation of recovery proceedings can help in generating funds for national development in a very big way. Private companies and corporate bodies are not facing any consequences for such defaults which are becoming a bigger and bigger burden on the national economy.

Some interesting takeaways from the AIBEA submission (accessible using the Moneylife Digital Team link above) include:

  1. The top 10 defaulters together owe state-run lenders a sum of Rs 17, 005 crores.
  2. SBI has the largest no of (685) wilful defaulters for a sum of Rs 43, 387 crores, PNB comes next with Rs 22,370 crores due from 325 wilful defaulters,
  3. 33 accounts had bad loans each exceeding Rs 500 crores, the total amount involved was Rs 32, 737 crores.
  4. 147 accounts had bad loans each exceeding Rs 200 crores, the total amount involved was Rs 67, 609 crores.

Recent changes to the banking laws have attempted to increase the pressure on the banks regarding bad loans, and in case of bank failure, the day is not far off when the presently proposed FRDI (Financial Resolution and Deposit Insurance) bill may become an Act. 

In its present form, the FRDI bill specifically provides a Bailin clause where recovery of the loss amount will be enforced on the account holders of the banks. While the banks may have thousands or lakhs of private citizens and retired persons having meagre amounts in small savings accounts and at most a handful of corporate bodies having huge deposits, it is anybody’s guess whether the recovery body (The Resolution Authority) will call upon the prime financiers to make good the loss and thereby risk their displeasure or put the burden on the small account holders who will have to accept such order by the authority, maybe at most, after a brief expression of dissent.

The Deposit Insurance part of this bill does require compensation to be paid to the account holder, but it should also be noted that this amount allocated by the authority could well be decided per person (as done in several countries), irrespective of the total number of accounts involved (self, Joint with the spouse, joint with a child, joint with a parent and so on), total amounts invested in the bank and also the types of investments done (Savings account, Current account, FDs, Bonds, etc. by the account holder). 

It should be stated here, that in India, the House has withheld its support for this bill specifically due to this clause, but the fact remains that globally the Bailin requirement has already been incorporated in several nations, because of pressure from big bankers and prime financiers of the global economy, who want to get rid of their liability on this as soon as possible without really trying to remove the cause.

Sooner or later, this bill may have to be implemented in India too.  In such a circumstance the perpetual drain of funds from major banks by corporate defaulters would need to be plugged in time and the only way would be to force recovery proceedings against deliberate defaulters.

The fact remains that with the pressure on governments and trade & industry to move towards green technologies, many companies taking out huge loans to set up projects using commercially untested technologies will knowingly be taking a big risk. These are the people that we need to support by all the means at our disposal.

In this condition, zero acceptance of deliberate default on loans should be mandatory and defaulters should be made to face the law individually as well as jointly.

 Setting up of fast-track courts to bring justice to these defaulters in the manner recently done for rape and POSCO offences would definitely be a step in the right direction and extending the prosecution to include the officers and the authorities sanctioning these loans beyond acceptable limits would forcibly bring questionable investments to a stop much earlier in the process and the net loss would also be limited to much smaller amounts.

Debates would surely start on the definition of ‘acceptable limits’, but with prompt consequences waiting in the wings, control is bound to be exercised within sensible limits by the individuals involved once the message is clear.

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Arun Pinto

For Arun, Journalism is an acquired passion, one that has helped him grow as a person. As an analytical journalist who prior to adopting Journalism as a profession had wide experience in the Automotive and Pharma sector.

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