Tarring all defaulters and bankers with the same brush will choke the flow of funds to business, scare bankers and kill entrepreneurship
India’s apex court is in favour of making public the names of bank defaulters but the country’s central bank does not support the idea. The Reserve Bank of India (RBI) has submitted a defaulters’ list to the Supreme Court and requested it not to reveal the names to the public, citing confidentiality. A Supreme Court bench, consisting of chief justice T.S. Thakur and Justice R. Banumathi, is examining whether the identities of those involved in trillions of rupees of default could be disclosed and the issues that had led to the defaults be debated.
The origin of this case was a public interest litigation (PIL), filed by the Centre for Public Interest Litigation, more than a decade back, raising issues of loans given to a few companies by state-owned Housing and Urban Development Corp. The bench has expanded the scope of the PIL and brought in first the RBI and later the ministry of finance and the Indian Bank’s Association, a national lobby group of lenders, in the proceedings. It had directed the RBI to provide it with a list of companies which have defaulted in repaying bank loans of at least ₹ 500 crore each as well those whose loans have been restructured.
Clearly, the Supreme Court is acknowledging the public outcry over swelling bad loans in banks. The gross non-performing assets (NPAs) of the state-run banks rose about ₹ 1.3 trillion in the December quarter to ₹ 3.93 trillion and those of all publicly traded banks were to the tune of ₹ 4.38 trillion. After provisions, net NPAs of the listed banks crossed ₹ 2.5 trillion in December, and state-run banks accounted for more than 90% of this. 15 Indian banks now have at least 7% and up to 12.64% gross NPAs and 14 of them are in the public sector.
The pile of bad assets will rise further in March, following the asset quality review carried out by the banking regulator which has asked banks to make provisions for three types of assets—new NPAs that were earlier not recognized by them; loans given to various projects where dates of commencement of commercial operations have passed but the projects have not yet taken off; and loans that have been restructured. The RBI has set a March 2017 deadline for cleaning up bad loans in the Indian banking system.
The combination of recognized NPAs, restructured assets as well as written-off assets was to the tune of 17% for public sector banks and 14.1% for the industry in September. The aggressive NPA recognising in the wake of the asset quality review will probably see the stressed assets rising to one-fourth of the state-run banking industry.
Indeed, the government has been recapitalizing the public sector banks. This means tax payers’ money is spent in keeping them alive. But what will we achieve by making the list of bank defaulters public? Should the public start pelting stones at their houses? Lynch them? If the idea is to recover the money, making the list public will not serve the purpose. The reasons behind a bank loan going bad vary from bad business decisions by a corporation to a slump in the economy, domestic or global, delay in getting regulatory clearances for projects, as well as the lenders’ lack of expertise and skill in project appraisal, risk management and monitoring. Then, there could be political interference too.
To recover bad loans and refrain from giving new loans to a company that has already defaulted, the banking community must know the defaulters. In mid-1990s when Indian banks were not technologically equipped and rogue borrowers were taking advantage of that by not paying up to one bank and approaching another for fresh loans, RBI started circulating the list of defaulters among banks. Now, four credit bureaus collate data of all borrowers in the Indian financial system. Credit Information Bureau India Ltd, the oldest of them, has the data of around 400 million consumer loans and 20 million corporate loans given by 1,000-odd banks and non-banking financial companies and all lenders have access to the data. At the first hint of any weakness in the repayment capacity of any borrower, the banks need to help them with advice and even fresh funds to tide over the situation. However, when a company sinks and there is no chance of its revival, the approach needs to be different. If they are not doing so, the regulator needs to pull up the management and even the board of banks.
Back in the 1990s, Citibank in India used to send eunuchs to the homes of loan defaulters to sing and dance and publicly embarrass them. There have been instances of banks putting up posters with photographs of the borrowers, women employees gate-crashing Diwali parties of defaulters, and even sending postcards to defaulting customers. The latest ad of Punjab National Bank on FM radio talks about offering flowers and get-well messages to bank defaulters. Such tricks work for loans given to individuals as well as small and medium enterprises but the high profile corporate borrowers are too thick skinned to be shamed if their names are made public. Vijay Mallya continued with his good times till recently, even after many banks had declared him a wilful defaulter.
A wilful defaulter is one who has the ability to pay up but doesn’t pay or diverts funds. Their names are in any case in the public domain because the banks have filed suits against them. The debt recovery tribunal is a fast-track route to dispose of such cases but the borrower can appeal against a tribunal judgement in a high court and even Supreme Court. Thousands of such cases have dragged on for years because of an extremely slow legal process. Strengthening the legal system will lead to quicker bad loan recovery and help nurse the banking system to health. Tarring all defaulters and bankers with the same brush will choke the flow of funds to business, scare the bankers and kill entrepreneurship.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of Sahara: The Untold Story and A Bank for the Buck. His Twitter handle is @tamalbandyo.