PSU banks writing off Rs 55,356 crore of corporate debt in six months is unacceptable

A disquieting report on the state of the public sector banks in India acting to further what can only be looked at as "crony capitalism" has come to fore. The Indian Express has reported that PSU banks have written off loans worth Rs 55,356 crore in the last six months alone, a 54 per cent jump in the amount written off around this time last year, which stood at Rs 35,985 crore. The loan write-off is being posited as banks trying to balance their books and clean them up by indulging in a bit of "harmless" financial jugglery.

The report states: "Figures obtained by The Indian Express from the RBI through the Right to Information (RTI) Act for the last decade show that banks had written off Rs 2,28,253 crore in nine years - from fiscal 2007-08 to 2015-16. The central bank did not provide data for the subsequent period. Separately, responding to a questionnaire from The Indian Express, ICRA said that write-offs amounted to Rs 1,32,659 crore in 2016-17 and the first six months of 2017-18. This means the total write-off in the last 10 years is now over Rs 3,60,000 crore."

Though the RBI had earlier clarified that writing-off non-performing assets (NPAs) isn't the same as waiving them off, and loans can still be recovered even as the banks "clean up" their balance sheets for better financial credit rating in future, that explanation has been criticised by many in the Opposition as well as those observing the banking sector up close. They have latched on to the issue.

Write-offs growing exponentially

The loan write-off of 2016-17 stood at Rs 77,123 crore, the highest ever in one year, and now with the 2017-18 half-yearly figure at Rs 55,356 crore written off in the past two quarters, the write-offs may exceed last year's figures.

It must be noted that over the last 10 years, the write-offs have exponentially increased with every passing year, with the sole exception of 2008-09, when it came down to Rs 7,461 crore from the previous fiscal year's Rs 8,019 crore worth loan write-off.

The write-offs during the three years of NDA have been significantly more than the preceding UPA era, standing at Rs 49,018 crore in 2014-15, Rs 57,585 crore in 2015-16 and Rs 77,123 crore in 2016-17. Given the current trend, the total write-off in fiscal year 2017-18 - current FY - is expected to touch Rs 1.3 lakh crore, according to observers. PSU banks wrote off Rs 25,573 crore in the April-June 2017 quarter and another Rs 29,783 crore in the July-September quarter.

"A substantial portion of this write-off is, however, technical in nature. It is primarily intended at cleansing the balance sheet and achieving taxation efficiency. In 'Technically Written Off' accounts, loans are written off from the books at the head office, without foregoing the right to recovery. Further, write-offs are generally carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks," the RBI had said in an explanatory note.

Non-transparency in NPAs written-off

However, The Indian Express report quotes an unnamed former RBI official, who alleges lack of transparency and misuse of public funds in the bad loan write-offs, as saying: "You can't clean up every quarter or every year. Once in five or 10 years, we are cleaning up the balance sheet for the last 20 years. You can't clean up every year. Generally write-off should be small, and should be used sparingly when there's some crisis. Technical write-off creates non-transparency, destroys the credit risk management system and brings all types of wrongdoings into the system."

"I have nothing against a write-off but it has to be done scarcely and within a policy, with all efforts taken to recover the money. Any asset which is backed up by tangible asset is never written off. Secondly, you must be subject to scrutiny for these write-offs. There must be a policy. You ask any bankers. They have written off Vijay Mallya's loan. Then how are they going to recover that money? Use it very sparingly and do it where it's essential. If there's asset, why are you writing it off?" the official added, reports The Indian Express.

While the bad loan or rising NPA crisis has been bogging the PSU banks down, the corporate loan write-offs have not received attention from mainstream media, and haven't attracted furious TV debates at all. In fact, in contrast, what has been debated threadbare on TV and in columns in major English and Hindi dailies has been the issue of farm loan waivers, which at Rs 33,000 crore, is nothing compared to the six-monthly write-off that the corporate have bagged from PSU banks.

In addition, reports on "frauds worth Rs 51,000 crore tied to advances" have surfaced, which the PSU banks have red-flagged to the RBI, amounting to a staggering 8 per cent of gross NPAs of the PSUs. This means that indiscriminate lending and no sign of recovery is now coupled with companies duping the PSU banks with financial frauds, and it coincides with PM Narendra Modi's digitalisation of financial technology drive.

The imminent 'bail-in' clause

There's also the issue of the forthcoming Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, possibly to be taken up in the winter session of Parliament, which has the highly controversial "bail-in" clause. According to a columnist writing for The Hindu, the bail-in clause risks the sovereignty of the account holder on his/her account because it may transform the savings account to a fixed deposit instead, by prioritising bank recapitalisation over the account-holder's a priori claim on the personal account. This means that banks that write-off corporate debts are piggybacking on the ordinary bank customers with smaller deposits in their accounts.

"What adds to the disquiet is the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 that was referred to a joint parliamentary committee this August after cabinet approval. This covers bankruptcy of businesses such as banks and insurance. Financial resolution includes solutions for banks facing 'material' or 'imminent' risk to viability depending on their capital and asset worth. This Bill also introduces the provision for a 'bail-in', whose purpose is to provide capital to absorb the losses of a bank and ensure its survival. Here, survival does not mean safety of depositors' money, but restoration of capital of the bank. The bail-in empowers the proposed Resolution Corporation to cancel a liability owed by the bank or change the form of an existing liability to another security."

In addition, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, promulgated on November 23, right before the winter session of Parliament was announced, and the Banking Regulation Act, another ordinance cleared in May, have made legislating a shadowy affair of pushing laws without wider consultations. Given the state of the economy, the NPA figures don't augur well at all.

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