Raghuram provides roadmap as banks sit on NPA powderkeg

Raghuram provides roadmap as banks sit on NPA powderkeg


Banks in the country are sitting on a gross non-performing assets (NPA) of around Rs 10.3 lakh crore as at the end of March 31, 2018. And this amounts to over 11 per cent of the advances during the last fiscal.

When an ordinary citizen fails to make timely payment of a monthly EMI on his vehicle or housing loan, banks wrote off Rs 1.44 lakh crore of bad loans in 2017-18.

In his note to a parliamentary panel, former Reserve Bank of India Governor Raghuram Rajan on Tuesday warned of impending disasters in the banking sector if corrective measures were not taken. While the erstwhile UPA Government led by the Congress can be held responsible for the sorry state of affairs, the present NDA Government cannot shy away from having its role in failing to not only stem the tide of growing NPAs, but also adding to them. Or else, the BjP would not blame the RBI policies under Raghuram's tenure for this sorry state of affairs.

The weakness of the banking system is what emboldened fugitive diamond trader Mehul Choksi, involved in the Rs 13,600 crore PNB scam to claim that 'false’ charges were levelled against him. This also explains how liquor baron Vijay Mallya could cheat banks and continue leading a pomp life in another country.

In his note, Raghuram points out that system has been singularly ineffective in bringing even a single high profile fraudster to book. Frauds and the usual NPAs are totally different.

Raghuram has said a good number of bad loans originated between 2006-2008 when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget. The economic slowdown that followed was not understood and it wais at such times that banks made mistakes.

Strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down, he said. There were a variety of governance problems coupled with the fear of investigation which slowed down government decision-making. Here the former UPA government and the present NDA can take the blame.

Project cost overruns escalated for stalled projects and debt servicing became difficult. Banks should have restructured the loans and made promoters bring in more equity. Till the Bankruptcy Code was enacted, bankers had little ability to threaten promoters.

Additional loans were offered to pay interest and make it appear that it was performing.

Proper due diligence has been lacking and outsourcing of analysis is a ‘weakness in the system, and multiplies the possibilities for undue influence’. Over-invoicing was rarely checked. Too many bankers put yet more money for additional “balancing”.

Too many loans were made to ‘well-connected promoters’ who had a history of defaulting on their loans.

Despite the setting up of Debts Recovery Tribunals (DRTs) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002, the amounts banks recovered from defaulted debt were both meagre and long delayed.

The inefficient loan recovery system gave promoters tremendous power over lenders. At times, promoters offered low one-time settlements knowing that the system would allow banks to collect even secured loans only after years.

He has also warned of small loans turning into bad ones if timely action is not taken.