Back in the 1980s, banks were institutions of trust and the branch managers were seen as powerful people. The sheer power of decision making on loan sanctioning, priority treatment to favourites and allocation of credit limit was delegated to branch managers and in absence of data analytics and technological tools, they were the most reliable source available. This made branch manager a much sought after position and banks, much like government offices of yesteryears.

As we understand, wherever loans related decisions are to be taken by individuals without credit exchange information and regulations and data based checks and balances, biases and favouritism creep in. The politically and socially powerful individuals encashed their relationships with the bank officials in the form of loans, that too at very low interest rates and against collaterals which didn’t carry much value. This led to rampant corruption and political influence in the decision making of banks eventually leading to a lot of wilful defaults.

Since the Modi government took charge in 2014, we are seeing a drastic change in the way we look at the banking system. The list of wilful defaulters has started being perused by media and the common man and defaulted loans (also known as Non Performing Assets, NPA) have become common discourse. Defaulters like Vijay Mallya and cases of frauds by people like Nirav Modi have started surfacing in and it is to be credited to the Finance Minister Sh. Arun Jaitley under the able leadership of the Prime Minister Narendra Modi.

Thousand of crores of loans are unpaid by business tycoons who are now absconding, taking shelters abroad. The transparency due to effective measures of the government is exposing the nexus between the power brokers and these wilful defaulters. This has put a big question mark on the credibility of the ‘reputed’ financial institutions.

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According to Raghuram Rajan – “Often, big borrowers are given a royal treatment by the banking system. Banks go out of their way to accommodate the borrowers’ failures. Retail borrowers don’t have the benefit of such overwhelming courtesy.”

Right from the Prime Lending Rate to Banks treating borrowers on the basis of loan size is one of the major obstacles in achieving total financial inclusion and also a reason for the rising NPA problem.

What are Non-Performing Assets? Any principal amount of a loan or interest on it or any instalments which remain unpaid to the banks for more than 90 days are categorized as Non-Performing Assets. Their classification is as follows-

Till 90 days: Grace period 90 days to 12 months: Sub-standard asset Beyond 12 months: Doubtful asset

In his statement to the Estimates Committee of the Parliament, Raghuram Rajan, the ex-RBI Governor has held the previous government responsible for the NPA mess. He said that a larger number of bad loans originated in 2006-2008 when Economic growth was strong. The gross lending increased manifold. From 1947 to 2007, in 60 years, banks gave loans worth 18 Lakh Crores while from 2008 to 2014; loans of the same banks scaled up to 52 Lakh Crores. He also said that scams, delay in probes, poor decision making are the reasons behind increased NPA. Banks consortium did not perform the necessary background checks of the debtor leading to wrong decisions.

Vijay Mallya got a loan of 990 crores on collateral of the dead Kingfisher logo. Political bosses pressurized banks to lend to the near and dear ones, thus encouraging crony capitalism. Raghuram Rajan also said that restructuring leads to evergreening. Restructuring of loans means a new loan replaces the outstanding balance on an older loan and is paid over a longer period, usually with a lower instalment amount. It is a kind of settlement between banks and debtors so that debtors get more time to repay the loans. Banks preferred to evergreen bad loans through restructuring rather than declaring them as NPA. As a result, there was a cascading of bad loans over a period of time, since restructured loans of today are the unpaid loans of tomorrow. On top of this, policy paralysis of the then government, delay in environmental and land clearances, failure to stop money laundering and smaller provisions for bad loans led to the failure of commercial enterprises adding to the NPAs even more.

In 2008, private banks were leading the list of banks with highest NPAs. ICICI bank topped the list of top 10 scorers of NPA, followed by small & medium sized private sector banks. This reflects a moderate condition of NPAs in public sector banks. By 2011 country’s large public sender lenders like SBI and Central Bank of India saw a significant increase in NPA while those of private banks began dipping. This is a clear signage of political interference, as a result, public sector banks started topping the charts with the highest NPAs.

By 2014, nearly all the banks having high NPAs were public sector banks. The NPA scam started showing prominently in the statistics of 2014. But why are NPAs still increasing after Modi government took over in 2014? Till 2014, only 2.5 Lakh Crore NPAs were shown, but after the asset quality review of RBI in 2015-16, the real NPAs were discovered to be around 8.5 Lakh Crores. Naturally, the newly discovered NPAs began showing up in statistics. Even though the accumulated NPA belonged to the 2008-2014 period, the interest on the principal amount began piling up leading to an increase in outstanding liabilities.

What has Modi government done to resolve the NPA mess? Under Insolvency and Bankruptcy Code 2016, banks will approach Debt Recovery Tribunals for recovery of loans with respect to individuals and partnerships. For companies and corporates, the banks will approach the National Company Law Tribunal. (NCLT). These tribunals gave teeth to the earlier helpless bankers and effective tools to bankers for recovery. The RBI, with its increased powers under the Banking Regulation (Ordinance) Act 2017, notified 12 top defaulters totalling to 2.5 lakh crore NPA for resolution in the NCLT. That is 25% of the total NPAs defaulted by just 12 companies (Bhushan Steel, Essar Steel etc).

Apart from these 12 defaulters, a number of corporate resolutions have been initiated in the NCLT in 2017, as shown below. Please note the steady increase in the cases filed every quarter.

January to March 2017: 36 corporates undergoing resolution April to June 2017: 151 corporates undergoing resolution July to September 2017: 353 corporates undergoing resolution

(Source: Insolvency and Bankruptcy Board of India, Quarterly Newsletter for July-September 2017)

One of the other ways of cheating banks was that promoters started buying buy their own company’s assets through other companies at discounted prices? To resolve this, the government amended the section 29A of the Insolvency and Bankruptcy Code Act prohibiting the existing promoters from buying the assets of their own companies under resolution thus ensuring that the same management doesn’t return back.

Capital infusion is important in banks because it serves two purposes- capital adequacy and credit availability. Since NPAs have resulted in a lesser credit for the banks, they lent fewer loans. Lesser loans mean lesser capital for industry leading to slow economic growth. Thus, recapitalization of banks was crucial for them for smooth functioning. In this effect, the government announced the highest ever recapitalization of 2.11 lakh crore rupees in 2017-18. In this context, it may be noted that capital infusion from 2008-2017 was a mere 1.18 Lakh Crore.

But how is this recapitalization different from recapitalisation by previous governments? Earlier, the capital infusion was ad-hoc and not linked to the bank’s performance. This time, RBI is keen on not considering the capital infusion as a dole. Out of total 2.11 lakh crores, only 76000 crores are direct budgetary support. Rest 1.35 lakh crores will be raised through Recapitalization Bonds issued by the government. Banks will invest in those bond i.e. give their capital to the government. The government will, in turn, use that capital to subscribe to the shares of the stressed PSBs, thus investing capital in stressed PSBs.

RBI will bring stressed banks under Prompt Corrective Action, PCA and put restrictions on some of their functions to prevent further deterioration. The banks are selected on basis of 3 parameters- Net NPA, Return on Assets (RoA) and Capital to Risk-weighted Assets Ratio (CRAR). The PCA imposes the following restrictions-

Ban on bank from entering new business

Ban from accessing costly credit

The cap on management fees paid to the management

Temporary non-payment of dividend to shareholders, followed by reforms and capital infusion.

Provisions are safety nets for any advance by the banks. For example, if a bank lends Rs. 100, it keeps Rs.15 extra aside as contingency if the Rs 100 are not repaid. Here, these provisions act as safety buffers. RBI has tightened the provisioning norms for the banks to ensure any future bad loans are made up for.

Apart from the fact that banks have reported collection of thousands of Crores in total by penalising small account holders for non maintenance of minimum balance, petty transactions, chequebook issue charges which is contradictory to the Modi Government’s focus on increase banking activities, transactions and inclusion of poor people in mainstream banking, it is heartening to see that now the strict provisions would not let the nexus of some corrupt businessmen, politicians and bank officials loot the hard earned money of citizens who once believed that their money is safe in banks.

Prime Minister Modi has shown zero tolerance on malpractices of banks and industrialists who are responsible for high NPAs. This is the major reason that NPAs have become a subject of public discourse and the public has suddenly started cursing these defaulters which were hidden for decades now. The government is not shying away in disclosing the names of NPAs despite short-term bad publicity in context of public perception as PM Modi is known to take tough decisions, keeping in mind, long-term benefits and larger interest of the nation.

Recently, the finance ministry has again opened the case of consolidation to bring in a reform in the public sector banks by merging some smaller banks with the bigger ones. This plan was put on the back burner after some banks complained of a spike in bad debts due to RBI’s provisioning norms.

In the recent past, people were worried about their money being safe in the Banks as there was an issue of trust. However, these effective actions by the Modi government has planted the seed of trust again and if the banks upgrade their credit and appraisal mechanism and make them robust for performing the assessment of the viability of projects then the banks will perform well and the NPAs will come down drastically. This is possible with the help of Machine Learning Techniques without human biases and favouritism. Modi government has shown strong will in this direction and it can be foreseen that the banks will again become those institutions of trust for people.

Remember the time when getting a house loan was much more difficult than to repay it and compare it with today when you can apply for a loan with just a click on your mobile. Time is changing and is so the economy. This take-off from Economy to Digital Economy has to be safeguarded from becoming Debtors Economy.

We just need to bear with the temporary inconvenience for a better tomorrow! As of now, the Modi government has decided to follow the truth and dared to challenge the norm of political interference and powerful lobbyists.

(The author is the OSD (Officer on Special Duty) – Chief Minister, Government of Chhattisgarh)