Narendra Modi’s election speeches, in the run up to the last general elections had a lot of colourful expressions. One was ‘minimum government, maximum governance’. Another was “send me to Delhi as your chowkidar and I will protect your wealth.” This was accompanied by another evocative assertion: “Na khaunga, na khane doonga” (neither will I take bribes, nor allow others to do so). If there was one place where he could have applied these repeated pre-election promises, it was at India’s public sector banks (PSBs).
Alas, the story has turned out to be quite different. Two weeks ago, Punjab National Bank (PNB) announced that it has been gypped of more than Rs11,400 crore by the high-profile jeweller, Nirav Modi. Close on the heels of the Nirav Modi scam, came news that his uncle Mehul Choksi, of Gitanjali Gems, had helped himself with a few hundred crores of rupees and a third, Rotomac Ball Pens, a company from Kanpur, owes over Rs3,700 crore to seven PSBs. The PNB scam could cost banks over Rs20,000 crore. A few years ago, a company called Winsome Diamonds left a hole of Rs7,000 crore in the books of many PSBs including PNB; its promoter, Jatin Mehta, has run away to the island of St Kitts. As Narendra Modi prepares to end his first term, the situation with PSBs is grimmer than ever. It is ironic that just a few months before the huge PNB scam came to surface, the government had announced a recapitalisation plan of Rs2.11 lakh crore for weak PSBs and is now planning to pump in more money to recapitalise PNB, again.
According to one estimate, there are 9,339 wilful defaulters—defined as those who have the capacity to repay their debts but have refused to do so, until now. The liabilities of these defaulters is Rs1,11,738 crore. In less than five years, the debt of wilful defaulters has jumped 340%—from Rs25,410 crore in 2013 to Rs1,11,738 crore in 2018. Also, PSBs seem to have written off Rs3,60,000 crore of bad debts in the past 10 years. Rating firm CRISIL has said the total gross bad loans (called non-performing assets or NPAs) in the banking system might rise to Rs9.5 lakh crore by the end of this fiscal. Bankers had estimated this figure to be over Rs10 lakh crore last year.
Far from maximum governance, we don’t seem to have even minimum governance. Thousands of crores of public money is being written off without anyone being held accountable. The spectacular defaults, such as those of Kingfisher Airlines and Winsome Diamonds, have led to no action against senior bank officials or bank chairmen who allowed the loans to go far beyond enforceable collateral. Nobody points a finger at the banking regulator, the Reserve Bank of India (RBI). All this ought to have attracted the focus of government; but it has done nothing much so far.
What Ails PSBs: The main problems with the functioning of PSBs are political interference and their gross misuse by the owner, the government of India. Since the 1970s, the government has used PSBs to fund various socially-oriented loan schemes and public sector projects which, often, left a big hole in the banks’ books. Even Narendra Modi’s first nationwide game-changing scheme, Jan Dhan Yojana, relied mostly on pushing PSBs to open accounts for the unbanked population.
For the first three decades after nationalisation, since Indian credit markets were not developed, private sector companies relied on PSBs for loans. When the lenders insisted that promoters bring in their own equity contribution, they would borrow money privately, show this as their share of the equity, inflate the project cost, siphon off the money and return it to their private lenders. In some cases, they would siphon off much more and then walk away from the sick project. India developed the syndrome of sick industry but w(h)ealthy promoters. This would not have been possible without corruption and lack of accountability. When such poor lending weakened the banks, the government would step and ‘recapitalise’ them and allow the game to continue.
From the mid-1990s, following the euphoria of economic liberalisation, Indian businesses expanded their capacities rapidly with the help of loans from PSBs and, so, the inherent weakness of the government banking system got magnified manifold. By 2001-2002, bad loans had reached an alarming 13% of advances, following a severe economic slowdown. Banks started complaining that they need tougher bankruptcy laws. No doubt, we needed better bankruptcy laws. But better laws were no match for corruption and lax supervision.
Care to know how many efforts have been made over the past 30 years—making laws and setting up organisations to implement them? Board for Industrial and Financial Reconstruction (1987), the Company Law Board (1991), Recovery of Debts Due to Banks and Financial Institutions Act (1993), and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI, 2002).
Plus, the so-called banking regulator has tried its hand (without any accountability) in: corporate debt restructuring (2001), joint lenders’ forum (2014), what is called the 5/25 scheme (2014), strategic debt restructuring (2015) and the scheme for sustainable structuring of stressed assets (2016). Nothing has worked.
Working with the same set of laws, private banks have a fraction of bad loans. Why? The real issue is corruption in various forms. How is it that, over and over again, PSBs are found to be horribly short of collateral—a cardinal sin in banking? Will you ever get money from a bank without putting up an asset as security? How do big borrowers get away?
The real story about PSBs is corruption, starting with how bank chairmen are appointed. Appointment of PSB chairmen used to be an elaborate process which started with intense lobbying by senior bankers and their industry lobbyists, with the Union finance ministers/secretaries playing favourites. Selection was, often, influenced by quid pro quo— a promise to be pliant and sanction certain specific loans that were bound to go bad. RBI usually rubber-stamps this selection process. Have you ever heard of a chairman & managing director being sacked by the bank’s board (which are also stuffed with political fixers) for poor performance? Who will go after a chairman when he enjoys support of the ministry of finance and RBI is hands-off?
Sleeping Regulator: In the discussion about bank frauds and bank loans going bad, few people even realise that we have a banking regulator—RBI. RBI officials have always miraculously escaped any kind of accountability for the lakhs of crores of bad loans and frauds, even though they inspect banks regularly, make banks fill up loads of forms and returns and also grace various banks’ boards. Indeed, in late-2014, the RBI governor, Raghuram Rajan, was arguing that bankers are scared stiff of the sword of vigilance inquiry hanging over their head and are, hence, unable to take business decisions! This was a nice deflection from the role and responsibility of RBI as the banking regulator.
It is almost four years and the Modi government hasn’t succeeded in changing anything at the PSBs. Its decision to hold Gyan Sangams, have a plan called Indradhanush and set up Banks Board Bureau have all been wasted efforts. It has not even been able to take the basic step of ensuring that no PSB is ever headless.
Meanwhile, the spread between average deposit rates and average lending rates in India is among the highest in the world. And Indian banks, led by PSBs, have come up with dozens of charges and fees that are extracted from retail customers. So, banks cover up their corrupt lending practices by gouging money from retail customers. And the Modi government is standing by and watching this. This is partly because the government itself uses PSBs to push its own agenda—whether it is MUDRA loans, Jan Dhan accounts or opening enrolment centres for Aadhaar identification.
In other words, unless the government faces up to the basic issues, such as accountability, corruption, meddling politicians, crony capitalism, regulatory failure, etc, PSBs will continue to limp along and will need recapitalisation every few years. Meanwhile, the lack of decisiveness and courage to deal with the PSBs has turned out be the biggest impediment to Modi government’s own economic initiatives which depend on heavy public investments with the money mainly coming from PSBs.
To start with, the sexual and entertainment needs of the bankers were already documented, and being catered for. Next were the envelopes which were neatly marked with for names. And finally, there were the gift packs, done in travel sized suitcases. Obviously every banker had come prepared with hand baggage only.
Documentation at such Lender Consortium Meeting is usually of the sort where huge amounts of paper are generated and passed around, making for even thicker files, the heavier the thud factor of the file, the more weight it carries for any extensions or conversions of funding for, say, capital goods into, say, operating capital or whatever.
Out of the almost 1-and-a-half-dozen banks represented, 4 quietly refused the suitcases, and there were no envelopes of special arrangements for them either. 3 of these were private Indian banks and 1 was a small regional bank. The PSUs and foreign banks swallowed whatever was given to them.
Class act was the man from one of the private Indian banks - he was being pressed to accept the suitcase, so he opened it, took a look inside, selected a CD which had some bhajans on it and said, oh Wow, my Grandmother will be very pleased with this, and then returned the rest of the suitcase with folded hands.
BJP and Congress are interchangeable as far as corruption is concerned. Congress having been in power for many more years has many more scams to its credit. If BJP rules as long, it will run neck and neck with Congress as far as corruption goes.
If PSBs are allowed to exist henceforth then they should not be allowed to loan money beyond a strict limit, say 50 crore at maximum. Anything beyond that must be borrowed from private banks. Also, PSBs must publish defaulters every quarter, so the businessman does not go from one PSB to another asking for loans while hiding his previous unpaid loans.
I don't expect Modi govt to do anything meaningful. The only option voters have is to kick the rascals out and let the previous rascals in hoping that they have learnt their lesson and are now, not incorruptible, but at least less corrupt than previously.