Defaulter Bailouts and Broken Trust: RBI’s Views Swing like a Pendulum
When it comes to bank loan defaults, the Reserve Bank of India’s (RBI’s) views seem to swing from one extreme to another, like a pendulum. It started in 2016 with RBI requiring strict classification of non-performing assets (NPAs) and fraud accounts. 
 
RBI then adopted the extreme view that borrowers need not even be given a hearing before declaring them wilful defaulters and fraudsters. The matter wound its way to the Supreme Court which said that principles of natural justice could not be side-stepped. It was my view that banks wanted to avoid formal hearings that would bring on record timelines and documents that exposed shoddy lending practices. This issue is still in court. On 20th June, the Bombay High Court granted interim relief to a bunch of petitioners, including one by the defunct Jet Airways’ founder, on the issue of declaring their loan a fraud without a hearing.
 
At the next hearing, the court may be told that the pendulum has swung to the other end with RBI’s controversial “Framework for Compromise Settlements and Technical Write-offs” issued on 8th June. This permits bank boards to undertake ‘compromise settlements’ or and ‘technical write-offs’ of money due from ‘wilful defaulters’ and fraud accounts. In a further act of benevolence, banks can lend again to the same defaulters after a mere 12-month cooling period!
 
Shockingly, this framework was issued just a few days after the RBI governor’s public speech outlining continuing governance issues and fudging of books by banks.  More on this later.
 
The brazen, repeated and colossal frauds on the banking system, mainly public sector banks (PSBs) are well known. They inevitably lead to massive loan write-offs, ultimately borne by all Indians in the form of a string of bank bailouts through the exchequer. While business can, indeed, fail for no fault of the borrower, the biggest defaults are invariably caused by collusion between bankers and borrowers. Some of these are classified as wilful defaulters, defined by RBI as ‘borrowers who are able, but unwilling’ to repay loans. The Sandesaras, with a thriving Nigerian oil business, are a great example. 
 
RBI’s sympathetic new stance towards such borrowers, who exploit a corrupt system, means that extraordinarily large sums of money will continue to be written off with regularity, specifically by PSBs. This can only be at the cost of education, healthcare and social infrastructure (much needed water and electricity projects in rural India) for ordinary citizens.
 
This column has repeatedly written about how the Insolvency & Bankruptcy Code (IBC) is gamed by secured lenders in cahoots with insolvency professionals. It has reached a situation where 80%-95% loan write-offs are now routine and average recovery is down to 30%. The quality of loans and collateral with banks is so pathetic that bids received for large defaulters like Reliance Capital of the Anil Ambani group and the Videocon group were substantially lower than the liquidation value of assets. These high-profile groups owed Rs40,000 crore and Rs71,000 crore, respectively, to banks. 
 
Instead fixing of the bankruptcy law (Bankruptcy Law Changes: Without Extensive Public Consultation, a Hurried Amendment Will Be Full of New Loopholes and Issues), the RBI circular may open the door to bigger collusion, allowing bank boards to decide on ‘compromise settlements’  and bypass the bankruptcy process altogether.  Remember, bank bailouts are largely for PSBs whose boards are packed with political appointees with little knowledge about banking. They will now decide on compromise and settlement, with politically connected accountants and lawyers are also appointed as independent directors to bank boards. TV Gopalkrishnan, a retired central banker, says, “In India, unfortunately, banks, in general and PSBs in particular, are sources of loot and, unlike in any part of the world, this loot is officially categorised as Non- performing Assets.”
 
The All India Bank Officers’ Confederation (AIBOC) and the All India Bank Employees Association (AIBEA), who represent over 600,000 bank employees, have vehemently opposed the policy, demanded its withdrawal and flagged it as a political move. Former AIBOC general secretary, T Franco, writes that banking fraud has risen 17-fold under the Modi government, from Rs34,993 crore in 2005-14 to Rs5.89 lakh crore in 2015-23.
 
Suspect Timing
The timing of such a drastic bonanza for bank defaulters is highly suspect for several reasons. First, we are heading into a general election when industry support becomes important in many ways. Compromise settlements will give several absconding defaulters, such as the Sandesaras of Sterling Biotech group (who are running a thriving oil business in Nigeria) or Jatin Mehta and family of Suraj Diamonds (fighting an expensive litigation in London as citizen of a tax haven), an opportunity to make a triumphant return and borrow again after a year. Maybe banks will also withdraw cases against Vijay Mallya, Nirav Modi and Mehul Choksi and go for a compromise settlement. All of them continue to live lavishly abroad.
 
The RBI circular mentions that criminal action will continue to be pursued against defaulters, but that is as meaningless. It is like the government’s aggressive insistence that defaulters will continue to be chased for repayment after ‘technical write-offs’, until the finance minister herself told the Rajya Sabha that only 13% of such loans were recovered. Remember, India’s investigation agencies are known for hyped-up arrests, but their record of successful prosecution is abysmal and will happen 20 years down the road, when the very same defaulters would have borrowed over and over again, after multiple cooling periods!
 
Secondly, just a few weeks ago, RBI governor, Shaktikanta Das, flagged specific fraudulent ways in which banks continue to fudge accounts to boost performance. He mentioned: a) bringing two lenders together for loan sale and buyback; b) persuading good borrowers to enter structured deals with stressed borrowers to hide bad loans; and c) manipulating accounts and adjusting repayment abilities to renew loans. Despite these issues, RBI is granting bankers more rights for compromise settlements with wilful defaulters who may have fled abroad. 
 
Thirdly, in December 2022, Nirmala Sitharaman had told the Rajya Sabha that loan write-offs by scheduled commercial banks has been a stunning Rs10.09 lakh crore (Banks Wrote Off Rs10.09 Lakh Crore Bad Loan from FY18 to FY22 while Govt Infused Rs2.76 Lakh Crore in PSBs) in the past five financial years (FY17-18 to FY21-22). It would be a stretch to blame these on previous governments. This figure does not include a massive  Rs2.76 lakh crore infused into PSBs to recapitalise them, or repeated bailouts of government entities such as Bharat Sanchar Nigam Ltd (BSNL) which got Rs74,000 crore in 2019, Rs1.64 lakh crore in July 2022 and a third bailout package of Rs89,047 crore approved by the Union Cabinet on 7 June 2023. 
 
Sticks for the Middle Class
In sharp contrast to the kindness towards crooks, is the government’s attitude to middle-class investors who depend on statutory regulators doing their job, and strictly regulated intermediaries, such as rating agencies, auditors and consultants, being honest about fulfilling their fiduciary duties. Lakhs of middle-class Indians, mainly in private employment, had their retirement nest egg invested in AAA rated bonds of Infrastructure Leasing & Financial Services (IL&FS) and Dewan Housing Finance Ltd (DHFL), the SREI group or the Anil Ambani’s companies. 
 
Investors of AT1 bonds of Yes Bank were persuaded by the Bank itself to switch from fixed deposits (FD) on the claim it was safer. The market regulator under successive chairmen looked the other way at the Karvy group’s many shenanigans, until it went down with a few thousand crore rupees belonging to innocent investors. The less said about RBI failing to spot the collusion between Housing Development & Infrastructure Ltd (HDIL) with Punjab & Maharashtra Cooperative Bank (PMC Bank) the better, because RBI’s own staff had over Rs200 crore invested in the Bank. 
 
These are hard-earned, tax-paid savings of the middle class. But the government, and its finance minister, has never even had a word of sympathy for the losses, let alone attempted to minimise the damage. The same hard attitude was shown when home-buyers were left in the lurch by the big realty company defaults. Those were easy to blame on the previous government’s ineptitude; but it cannot be the case today. 
 
The government’s attitude to middle-class investors is no different from the way it has treated the wrestlers’ protest alleging sexual harassment by our international champions. While the women athletes have been vilified, the powerful political strongman is protected in multiple ways. How is this any different? 
 
 
Comments
VN KULKARNI
10 months ago
SO FAR WRITE-OFFs,SETTELEMENTS WITH BIG BORROWERS WAS RESTRICTED TO PSBs. NOW URBAN COOP BANKS ARE ALSO BROUGHT UNDER THESE 'EASY WAY OUTS '. AS MOST OF THE UCBs ARE CONTORLLED BY POLITICIANS ,THE RESULT WILL BE VERY DANGEROUS AND WILL TAKE THE TOLL OF UCBs IN DAYS TO COME.
yerramr
10 months ago
Very comprehensive and analytical. It is ludicrous to find fault with the arguments. IF the banks' books of accounts reflect the true accounts of customers, there is no reason for the DRTs to fail. There is also no reason for the Courts to take unduly long time to settle the debts. Gone are the days when customers can safely leave the passbook in the hands of the counter-clerk for corrections and pick up later. Now machines do the job. But the figures therein are a reflection of the ledger accounts and they needed checking. Many find debits in their accounts are mysterious. Complaints have a long journey of redress. Systems in some banks are so troubling even for the employees that many personal banking branches' staff still sit late hours!!
There have been repeated cases of documents of the borrowers missing from the financing banks - both public and private. Does this not amount to carelessness with abetment from the top management when the later either pleads for time or succumbs to a penalty? I recall K.C. Chakraborthy repeatedly mentioning to banks that technology should have led to improve service and at less cost but the reverse seems to be happening. Who remedies the situation? IBA lobby is so strong that the regulator perhaps is left with no option to surrender. As a case in instance, please compare the list of priority sectors in 1970s with the list of priority sectors now. We talk of financial inclusion!!
vyas.nikky
10 months ago
Written very conveniently Ms. Dalal.. your articles on banking sector are nothing short of a self esteem embezzlement. Nevertheless, coming to your point on blaming previous govt. - Yes all these loans which you mentioned were extended in the lost decade ruled by UPA. In 2015, Mr Rajan secretly started audit review of banks and suddenly things started to crop-up, perhaps to blame it on Modi govt. That's when master stroke of IBC changed the game, not only it recovered the very little money it could, it has also handed over those plants/assets to new promoters like Tatas etc. In steel sector many capacities which were shutdown in UPA regime, opened and ramped up. This led to India boosting it's steel output and domestic producers benefited. Same pattern was witnessed in Power sector and India could manage it's power deficit with these plants running again. This has also boosted new entrepreneurs confidence which now can rely on the govt to address their concerns be it power supply, etc. Banks would have otherwise just be sitting on this non-recoverable money and jeopardizing these assets.

Pls remember these banks were consistent dividend payer to UPA, pls check this but Modi govt didn't see any dividend coming from and infact put lot of money to recapitalize these PSBs and only since last two years some dividend flow is witnessed. Not to forget that in between COVID happened which had put many businesses off track but fortunately damage is not expected as earlier envisaged.

Coming to middle-class point, strong banks have capacity to hold to lower rates for longer time. Most of the growth in credit in Modi era is driven by retail loans. Retail loans are being extended at sub 9% rates which was a distant dream in UPA era. Mudra loans were extended with minimum questions asked, many new business women have witnessed their fortune turned. No denying that Mudra loans might be NPA but retailers benefitted. Pre approved loans are being extended by even PSBs.

To compete at global scale we need more such IBCs and new RBI circular is perhaps the only way. Not to forget, PSB banks boards had government nominees since always but they also have RBI nominees on the board and independent directors to guide. Atleast appointment of bank MDs and EDs is happening in a transparent manner now. PSBs are leading in UPI and the only reason why UPI is free till date. UPI has shown a way to India that even a requirement of loan of a tea seller can be assessed based on its cash flows.

Its been many years since your old foe Harshad Mehta died. Perhaps he was caught at the wrong end of the cycle, thanks to you but he never betted against India. What I read in your articles is a very sad, rhetoric, and a wild bet to pull India and dreams of its people back down again.
Meenal Mamdani
Replied to vyas.nikky comment 10 months ago
Your reply shows that either you are genuinely clueless or a Modibhakt.
Ms Dalal has done more to expose the failures of bank management than any other individual at great personal risk.
It is a shame that people like you make baseless allegations against Ms Dalal and MLFoundation because you wish to give a clean chit to BJP.
Yes, the previous governments too are to blame but now we have state capture like never before by one individual and so we have to expect even more looting of the state under this government.
sucheta
Replied to Meenal Mamdani comment 10 months ago
Thank you so much Ms Mamdani. This is new India where people don't feel the need to know facts. The line about Harshad Mehta being a foe -- rather than me doing my job as a journalist - tells you that his knowledge and vitriol comes from watching a television serial. He also feels the need to explain things to me, when a bit of searching would show that the biggest bad loan issues -- even Videocon, Essar, all the steel companies etc have been written and hammered by me since the 1990s. But people think I spent 20 years writing ONLY on Harshad Mehta -- who did not even form 1% of my total writing. Also, I have written about these banks, institutions, companies, and bad loans and criticised them, under a variety of coalition governments! After all my journalism spans 35 years and includes losing my job twice - precisely for exposing powerful industrialists and their political nexus. Writing about Harshad Mehta in fact, did not cost me my job!! Thanks again for standing up for me.
Meenal Mamdani
10 months ago
Banks were nationalized at a time when Indian economy was not expanding as it should have due to reluctance by banks to lend to rural and vital industries because of perceived risks.
Is it not time for the GoI to get out of banking altogether and let the private sector do the work?
However, seeing how the private banks were bailed out in the US during the 2008-2009 financial crisis, on the excuse that they were too big to fail, perhaps even this will not stop the corruption by banking officials, politicians and supine administrators in the finance ministry.
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