Narendra Modi's many passionate election speeches last year and earlier this year were punctuated by a very colourful expression. "Send me to Delhi as your chowkidar and I will protect your wealth," he claimed. This was accompanied by another colourful expression: "Na khata hoon, na khane deta hoon" (I neither make money, nor do I allow others to make money).
We hope that at some stage Mr Modi starts applying these two of his many pre-election promises where they matter the most: government-owned banks.
Public-sector banks (PSBs) dominate the Indian financial sector. They hold the bulk of people's savings. They are the main source of loans to small businesses and large projects alike. They are vehicles for his ambitious Jan Dhan Yojana. They are also inefficient, poorly governed and beset by largescale corruption.
In May, the All India Bank Employees Association (AIBEA) assessed wilful defaults worth Rs 70,300 crore in 400 PSB loan accounts. They also estimated that over the past seven years, there were fresh bad loans worth Rs 4.95 lakh crore in the PSBs - while during the same period, these banks wrote off bad debts worth Rs 1.4 lakh crore. Gross non-performing assets (NPAs) and bad loans in these banks had increased more than three times to Rs 1.64 lakh crore on March 31, 2013, from Rs 39,000 crore on March 31, 2008.
Thousands of crores of write-offs are happening without accountability. Spectacular defaults such as Deccan Chronicle and Kingfisher Airlines have led to no action against defaulters or against the senior bank officials and chairmen who allowed the loans to go far beyond enforceable collateral. This is a huge scandal, which should get the chowkidar worried, because the reasons for such massive bad loans and write-offs are deep-seated. Forget about maximum governance, even minimum governance in missing in the PSBs. And has been for decades.
In the 1970s, the government used the PSBs to mainly fund its various socially oriented loan schemes and public-sector projects, which often left a big hole in the banks' books. Throughout this period, private-sector companies also relied on government-owned banks and financial institutions for loans. Since the lenders insisted that promoters bring in substantial amounts of cash, borrowers would inflate the cost project and siphon off the money.
Therefore, contrary to all prudent norms, projects were more than fully funded by government banks, with most promoters having no skin in the game. Naturally, many projects turned sick while the promoters enriched themselves. Bankruptcy laws were weak. Nothing could curb the corrupt nexus between PSBs and their defaulting borrowers. When such poor lending weakened the banks, the government would step in and "recapitalise" them for the game to continue.
From the mid-1990s, amid the euphoria of economic liberalisation, Indian businesses expanded their capacities rapidly with the help of loans from PSBs and so the inherent weakness of the government banking system got magnified manifold. By 2001-2002, bad loans had reached an alarming 13 per cent of advances.
After 30 years of unaccountable lending, banks started complaining that they need tougher laws to enforce collaterals. In response, the government created the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi) of 2002, designed to help banks in the recovery of bad loans.
One of the key provisions of the Act is for banks to be able to auction the assets of defaulting borrowers. But notice that even after getting a tougher law, banks have not been able to claw back much money from Vijay Mallya of Kingfisher or the Reddy brothers of Deccan Chronicle. The answer is obvious: bank officials have lent money without adequate collateral, as part of their nexus with promoters. Yet neither the Reserve Bank of India (RBI) nor the finance ministry is questioning the officials or directors involved.
Indeed State Bank of India (SBI) Chairman Arundhati Bhattacharya, in an interview with the Financial Times last week, has called for a shake-up in the regulatory system and asked for tougher rules for defaulters, as well as "a proper bankruptcy law to help get orderly resolution of [bad] assets".
That is a smokescreen. Working with the same set of laws, ICICI Bank, Axis Bank and HDFC Bank have negligible bad loans. Why? The real issue is corruption in various forms, starting with how bank chairmen are appointed.
Appointment of PSB chairmen is an elaborate process. It starts with intense lobbying by various senior bankers. Finance-ministry bureaucrats play favourites. Selection is often influenced by quid pro quo - a promise to be pliant and sanction certain loans that are bound to go bad. The RBI usually rubber-stamps this selection process.
Who will go after a chairman when he enjoys the ministry of finance's support and the RBI is hands-off?
Mr Modi has repeatedly talked about governance. The first step in governance of PSBs is to fix responsibility on their top brass for loans that have turned bad. Right now, accountability in the PSBs is a black hole despite the fact that banks have stringent credit-appraisal process.
Small businesses complain of onerous conditions imposed by banks before loans are sanctioned. Often banks arm-twist borrowers to buy some expensive insurance as an unwritten precondition. And yet loans worth tens of thousands of crores have gone bad - something that should happen only in exceptional situation, such as a natural disaster. A loan such as that of Kingfisher goes progressively bad, not overnight. What were banks doing at each stage that Vijay Mallya's collateral was falling short? Would they extend the same courtesy to a small borrower?
The fact is, borrowers have repeatedly siphoned off money from the banking system in connivance with bankers, no matter what kind of regulatory system and process we have had.
The previous prime ministers did not claim to be chowkidars. Mr Modi has. For the first time in 45 years, can taxpayers hope that accountability in the PSBs will be fixed?
The writer is the editor of www.moneylife.in
editor@moneylife.in
editor@moneylife.in
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