Banks have occasionally failed in India, but such failures have been few and far between. More importantly, no depositor has lost money in any commercial bank in the country since the failure of the Palai Central Bank, based in Kerala, in 1960. Such a record has meant that the public trusts the banking sector and believes that it has robust systems, processes and governance in place.
But recent events clearly indicate that the rot has set in. Initially, it was believed that only the public sector banks were afflicted but now, we know that private sector banks too have a governance deficit.
The frequency and scale of wrongdoings in the banking sector has meant that Urjit Patel, Governor, Reserve Bank of India, has been asked to appear before a parliamentary panel on May 17 to clarify on the recent banking scams. When Patel recently said that the RBI does not have enough powers to deal with public sector banks, the government openly contradicted him.
Going, Going, Gone
The gross non-performing assets (NPAs) of banks is around Rs 9 lakh crore. This is expected to rise by least Rs 8,000 crore as advances to the scam-hit Gitanjali Gems group have turned bad during the quarter ended March 31, a PTI report stated.
Shiv Pratap Shukla, Minister of State for Finance, said in a written reply in the Lok Sabha that “the amount involved for public sector banks is reported at Rs 1,10,050 crore” during the April-December period of 2017-18 fiscal.
The country’s largest lender State Bank of India (SBI) accounts for over 27% of the total amount owed to public sector banks by wilful defaulters as of March 2017. As many as 1,762 wilful defaulters owed Rs 25,104 crore to SBI as on March 31, 2017.
The Punjab National Bank (PNB) came in second with 1,120 wilful defaulters with NPAs of Rs 12,278 crore. The gross NPAs of all the banks totaled Rs 8,40,958 crore in last December. These were mainly industry loans followed by services and agriculture sectors.
The gross NPAs of scheduled commercial banks as on December 31, 2017, owing to loans to industry stood at Rs 6,09,222 crore, accounting for 20.41% of the gross advances. While Rs 1,10,520 crore (5.77%) was due from services sector; Rs 69,600 crore (6.53%) from agriculture and allied activities; Rs 14,986 crore from other non-food credit and Rs 36,630 crore (2.01%) was outstanding from the retail sector, Shukla informed the Lok Sabha.
PSBs wrote off Rs 516 crore by wilful defaulters during April-September 2017-18. The number of wilful defaulters, who did not repay loans to PSBs despite the capacity to do so, rose by 1.66 per cent to 9,063 in the April-December period of 2017-18.
More than NPAs
Raghuram Rajan, former Governor, Reserve Bank of India, had began the NPAs clean-up exercise by asking all banks to recognise their bad loans. The clean-up started from December 2015 with RBI identifying 150 big accounts.
However, it was not just the bad loans, which the banks were dealing with. Gradually, the industry-banking nexus started showing up. While it was easy to blame the ‘clever’ minds of these businessmen-turned-wilful defaulters, the role of bankers and higher officials also came into question.
Kingfisher’s Vijay Mallya’s is now an old story. Recent ones like Nirav Modi and Rotomac point to the mess in the system and the empty talk of corporate governance.
ICICI Bank, the country’s largest private sector lender, is embroiled in a conflict of interest controversy. Axis Bank too is staring at the bad loan problem, while it has started scouting for a new head after its present chief Shikha Sharma’s term was extended for a mere six months, as against the initially recommended three years, with the RBI putting its foot down.
With the NPAs and number of wilful defaulters rising, the government has directed banks to get the passport details of all borrowers taking loans of Rs 50 crore and above.
“Next step in clean and responsible banking. Passport details must for loans above Rs 50 crore. Step to ensure quick response in case of fraud,” said Financial Services Secretary Rajiv Kumar speaking on the proposed action. For all existing loans of over Rs 50 crore, banks have been asked to collect passport details of borrowers within 45 days.
PSBs have also been directed to probe all NPA accounts of over Rs 50 crore for possible fraud and report the cases to CBI. They now need to monitor loans above Rs 250 crore and raise red flags in case of violations.
The Insolvency and Bankruptcy Code, 2016 was amended to bar wilful defaulters from participating in the resolution process. The RBI has also limited the stressed assets resolution process to 180 days.
On Saturday, the government approved the Fugitive Economic Offenders Ordinance 2018 that provides for confiscating properties of escapists.
These actions will help plug some gaps, but will they be enough? We must address the employee problem to ensure that the system is not gamed as in Punjab National Bank. Checks and balances in our banking system need to be reconfigured to withstand new age pressures and tactics.