Root of the NPA problem in Indian Banks is post 2009 – when World was doing Quantitative Easing (QE) to stave off 2008 recession – India was not in any kind of need for a QE (Since GDP growth had lowered down but there was no recession in India). Congress still did QE in India on pretext of World doing QE – and gave massive loans to crony businessmen close to Congress – just see the list of who’s who – Mallya, Jindals, Jaypee, Ruias of Essar etc – when global Trade had tanked, where would this money go? To create capacities for which there was no end demand? Or to be siphoned off by these Crony capitalists? Congress also delayed recognizing these bad loans till it was in power.
With coming of Modi – he gave a free hand to RBI Governor Raghuram Rajan (R3) – who told Banks – do whatever it takes to recover this money – and first of all, recognize all such bad loans. Result – Debt for Equity swaps, selling of assets and recognition of NPA’s with concurrent huge losses of Banks.
Globally, 70% of loans are provided by Private Banks. In India, the figure is the opposite. PSU Banks provide 70% loans in India with Private Banks chipping in with 30%.
Clearly, nationalization of Banks by Indira Gandhi was a colossal mistake. PSU Banks are prone to arm twisting by Ministers, their Management is for short-term and hence is disinterested in long-term health of the Bank, most often Chairman position of PSU Banks is bought by corrupt Bankers and hence their foremost interest is to earn while on the job, our Judicial system being stuck in backlog of cases and prone to misuse – even good Acts like Sarfaesi & DRT’s are not working. The new Bankruptcy Act is a welcome step and amendments to Sarfaesi & DRT Acts in next session of Parliament will aid recoveries.
Crux of the problem also lies in the fact that Project Funding as the term goes is infeasible in India, due to Judiciary being in permanent Coma. Project Funding abroad means Banks take project risk (Primary Collateral being Charge on cash flows and Charge on fixed & variable assets being created). But in India, since project risk is traditionally sky high (because Judiciary is unreliable), Banks interpret Project Funding to mean inclusion of Personal Guarantees, Corporate Guarantees, Charge on personal assets of Promoters, Charge on shares/ equity of promoters etc. While this is understandable, but look at history of Banks trying to enforce such Guarantees and charge on assets to recover bad loans – Loopholes in Judicial process and delays are exploited to the hilt by Promoters who have loads of money siphoned off from the Loans to their company!
Reality is – Promoter overstates value of assets to create a bigger project – so that when Loan comes in, he siphons off this loan and re-routes this as equity. In reality – Promoters takes off his initial equity completely and the entire project is, in fact, funded by Bank loan. This is the dark truth! When project goes bad, what can Bank do? Sell off those assets or try to run the company? Both prove a failure. And NPA’s result.
Resolution to the problem – First as currently happening – recognize all such bad loans to get the extent of the problem. Get Bankruptcy Act, amendments to Sarfaesi & DRT Acts in place (which will happen soon), tag Wilful Defaulters, Name & Shame, then since de-nationalization of PSU Banks is not possible (lack of BJP majority in Rajya Sabha), first merge Banks to reduce their number from 27 to a decent 4-5. Then offload stakes in these 4-5 big Banks by keeping Government stake at 51%. Simultaneously, force Promoters to offload their assets and pay back the Banks. Lastly, when BJP gets enough numbers in Rajya Sabha, exit from these 4 Banks completely and only keep SBI type Bank for social projects of Government like Rural branches/ Farmer lending. This, in my view, is the reasonable way ahead.
Good articles to read on this issue: