Why banks' bad loan mess has become murkier now
The murky bad loan mess in the Indian banking system has turned murkier. While the efforts to recover public sector banks' non-performing assets (NPAs), worth Rs 10 lakh crore, are yet to yield tangible results, the government seems alarmingly divided on the genesis of the NPA problem.
Are bad loans in banks the result of an organised plunder of crony capitalists under the UPA regime — or did Indian corporates default on their bank debts due to the economic slowdown after 2008?
Unlike the earlier stated stand, that bad loans are the result of an economic downturn, the government is now airing two versions of the banks' NPA story — each starkly opposite to the other.
The launch event of the India Post Payment Bank on September 1 was not the first occasion when Prime Minister Narendra Modi called bank NPAs the "underground loot of banks" under the UPA regime. In July, while replying to the no-confidence motion against his government, PM Modi spoke about public sector banks being plundered when his government had come to power in 2014.
"I want to tell you about the NPA problem. Much before internet banking, the Congress invented 'phone banking' and this caused the NPA mess. A phone call would get loans for their cronies and the nation suffered. The underground loot of banks continued from 2008 to 2014. In six years, they allowed their favourites to loot the banks. Whatever was gone was gone. For repayment, give a new loan. This vicious circle trapped Indian banks in NPAs," PM Modi said in the Lok Sabha.
PM Modi's comments are not only startling but shocking to the concurrent diagnosis of bank NPAs problem as enunciated by finance minister Arun Jaitley in August 2017, during the debate on the Banking Regulation Amendment Bill.
"Government banks give more loans to industrial and infrastructure sector, while private banks focus more on consumer banking. I do not want to politicise it. When (the loans) were given? Why they were given? At that time, the global economy was growing. Companies increased their capacity by bank financing. Later, commodities prices fell and companies got stuck," Jaitley said in the Rajya Sabha.
PM Modi's repetitive claim that the bad loans are a result of an organised plunder, has put a big question mark on his government's NPA management strategy.
Over the last four years, the government has never taken NPAs as an act of crime or fraud, but attempted to deal with it as a crisis born out of an economic downturn.
The government not only offered a bankruptcy window to defaulters, which forced lenders (banks) to go for massive haircuts (giving up part of its claim from a borrower in order to clean its balance sheet) on their bad debts. Under the new practices, banks made huge provisioning (earmarking capital and profits in lieu of the bad loans) and incurred a loss of Rs 85,370 crore in 2017-18 against profits in the year ago.
It is not that investors in banking stocks have lost huge money, but government infused fresh capital in the banks from the budget — ie taxpayers' money.
As the RBI changed the prudential norms for identifying bad loans and the standards of declaring them as NPAs in 2014, the government now has full knowledge of who committed this loot and how, if at all, NPAs are seen as a robbery on banks.
If NPAs are a result of an underground loot of banks, instead of launching criminal proceedings against defaulters, why were banks and the Budget made to bleed to clean the mess?
Banking bailouts may be indispensable, but after all, the money 'looted' from banks is common people's savings. Also, the capital given to banks by government belongs to taxpayers — and they have every right to know how much NPAs are a result of Jaitley's thesis of the economic downturn, and how much of it is on account of underground loot, as PM Modi claimed.