Is government Really Tough Against Bad Borrowers of Banks?

In tough times, Finance Ministry plans to crack down on loan defaulters--Economic Times 

By Atmadip Ray & Sangita Mehta, ET Bureau | 17 Apr, 2013, 04.29AM IST

It took at least three years, eight months and 12 days for state-owned banks to begin the recovery process after Vijay Mallya-promoted Kingfisher Airlines first flirted with default on its loans, which went through a half-hearted restructuring in April 2010. 

That pales in comparison to the ultimate default — of the magnitude of Rs 7,500 crore, equivalent to last fiscal's national budget — under the Jawaharlal Nehru National Urban Renewal Mission for improving the conditions in the country's cities . That lethargy may now become history. 

Times have changed and so have priorities. Finance Minister P Chidambaram is talking tough, at least publicly. His lieutenants echo his words. 

The change in attitude at North Block seems to have bolstered courage in the board rooms of banks in the Bandra-Kurla Complex — the beehive of banking activity in the financial capital of Mumbai. 

SS Mundra, who became the chairman and managing director of Bank of Barodon January 21 this year stunned his staffers, who were for decades used to bosses lecturing about growing loans and deposits. "The current scenario is not for aggressive growth and so the focus of the bank should be recovery and upgradation of bad loans and consolidation of business," Mundra told his colleagues at Bank of Baroda. 

Gross non-performing assets (NPA) ratio of public sector banks increased 4.01% in September 2012 from 2.3% six months earlier. NPAs grew at 43.9% as on March 2012, far outpacing the credit growth of 16.3%. 

Restructured assets under corporate debt restructuring are currently Rs 2,27,000 crore, 4.4% of the total banks' loan. The Reserve Bank estimates that if restructured loans turn bad, the overall bad loans in the system could double from current levels. 

"They have realised that the market value of all security they hold and the loan outstanding should not reach an unhealthy level as many businesses are not getting capital-adjusted return on investment," says Robin Roy, PwC India's associate director for financial services. 

Investors have turned negative on state-owned banks, thanks to their approach to rising bad loans. Moreover, their valuation gap with private banks such as Axis and ICICIhave widened substantially. These two private banks trade at double the valuation of Bank of Baroda or Bank of India. 

"The balance sheets of SOE (state-owned enterprise) banks are weak — and are likely to remain so — impaired loans are close to double digits and large capital is required under Basel 3,'' say analysts at Morgan Stanley led by Anil Agarwal. 

Part of the problem has been that the shadow of political masters always looms large over state-owned banks. Receiving intimidating phone calls from well-connected borrowers is a routine hazard for every chief executive in a government bank. But that seems to be changing with the return of Chidambaram at the finance ministry. "We cannot have an affluent promoter and a sick company. Promoters must bring in money," Chidambaram said on March 18.

Bank chairmen are emboldened by the public statement of the minister and it was visible a few days ago. A few days back, a loan defaulter with strong political backing demanded an apology from a CEO for initiating the recovery process against him. Unlike in the past, the threat did not deter the bank executive. The defaulter has now promised to pay back!

The spiralling amount of bad loans has raised alarms in the government, like never before, as it is straining the fiscal deficit. With rising defaults, the government has to invest fresh capital to keep the banks going. 

But the original sin was committed by the government when it prodded banks to lend to infrastructure companies by turning a blind eye to the potential losses because of asset-liability mismatches. The government's policy inertia added to banks'woes. 

"Post 2008, banks have shifted their focus to corporate lending from consumer loans, creating more singlename concentration. When one or two large names like Kingfisher becomes an NPA, it becomes significant to generate spikes in stressedassets ratio," says Ananda Bhoumik, senior director at India Ratings& Research, a group company of global rating firm Fitch. 

A finance ministry review of banking data revealed that the top 30 clients of each bank account for a major part of their NPAs. Each bank has sent the name of its top 50 defaulters to the ministry for records and it wants stringent action against them. 
"It is only when deterrent and stringent action is taken against the defaulters and recoveries are ruthlessly effected from the biggest offenders, will the message that banks are serious about recoveries pass on to existing and potential defaulters," financial services secretary Rajiv Takru said in a recent note to bank chairmen. 

"It is of absolutely no use to repeatedly threaten action and simultaneously pass time on one procedural excuse or another. Please understand that each additional day of default translates into huge sums of additional money that the public system/shareholders/ government incur in terms of interest, cost etc. on the overdue amount," said Takru. 

These are encouraging signs for bankers who for long did not receive much support from either the bureaucracy or political masters. But some are sceptical on how much it would translate into. 

COMPETITION AMONG BANKS 

In fact, competition among banks itself is being blamed for some of the ills of the system. To grab a higher business share, banks did not disclose information about clients leading to poor information sharing. 

"But the unfortunate part is that discipline among bankers itself has been diluted and multiple-banking approach (giving loans without consulting the lead bank in a project), has spoilt borrowers which has now put banks in difficulties," says Andhra Bank chief BA Prabhakar.

Will these events become a turning point in the history of Indian banks, or is it just an other bad patch that will pass and be forgotten once growth revives? Going by history, an economic recovery could halt loan recovery. But if state banks have to be counted as worthy of investment, they must imbibe the private sector's virtues in recovering loans, than just focus on lending.
http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/in-tough-times-finance-ministry-plans-to-crack-down-on-loan-defaulters/articleshow/19588389.cms
My Comment:============================== Last but not the least , even if bank staff manage to work late and work on holidays to ensure maximum recovery from bad borrowers , they will not get adequate support from legal and administrative machinery. Lacs of cases are pending in various courts for decades , but the Finance Minister do not have time to take cognizance of such inordinate and abnormal delays in disposal of cases.

And the most important is how learned FM will stop rampant corruption in all offices working under him . Not a single file moves without greasing in the office of DM, Certificate officer, DRT etc . 

Further how he will verify the data furnished by banks pertaining to net NPA.

What will happen if bank officers stop sanctioning new loans in fear of punitive action.

What will happen to customers if all bank employees are engaged in the task of recovery of loan. 

Are team of Chartered Accountants reliable in the eyes of FM? Since long team of CAs have vetted the balance sheets of all banks and inspite of all such bought certificates , banks continue to be sick of many bad accounts and volume of bad debts.How will FM control bad mind of CAs.

How will FM change the minds of advocates and judges who work in nexus with each other to indefinitely delay the decision on cases filed by banks against loan defaulters for recovery of bad debts?

How FM or PM will stop political exploitation of banks ? Will he be able to stop the culture of loan mela and culture of waiver of loans or the imposed compromise settlement culture?


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