The banking crisis has adversely affected not just the public sector banks in the country but also the private banks. Improper lending and blatant political interference have saddled these banks with bad loans
India’s bad loan situation is getting worse. The myth of better performance of the so-called private banks is now busting. Now worms in private banks are coming out. Private banks have increased their non-performing assets by 39 per cent, to Rs1.16 lakh crore; a large sum considering they operate in a narrow band. Total outstanding loans by private sector banks stood at Rs14.33 lakh crore, 20.8 per cent, ie one-fifth of their total credit.
Rating agency ICRA says that private banks have been giving more loans. It has increased three times faster at 18.3 per cent. They possibly took the strictness that public sector banks have started adopting of late. They are sanctioning far less loans than earlier. The PSBs saw a credit growth of 6.2 percent till September 2015.
It’s a myth that private banks are better managed. Many of the private banks re-employ employees of the PSBs. The cultural difference is minimal. A Reserve Bank of India data shows that the rate of growth in bad loans at private banks has been equal to the PSBs. Public banks had total outstanding loans of Rs34.47 lakh crore. Entire outstanding is not bad loan. In 2014-1205, 19 public banks showed a gross non-performing asset rise of Rs1.92 lakh crore 39 per cent year-on-year increase.
During the same period, new private banks’ gross NPA rose by 36 per cent, year-on-year, to Rs24,534 crore. Supposedly, one bank recorded a 44 per cent rise in gross NPAs at Rs15,000 crore. The operations of the private and public banks are not much different. Their exposure too is of the same level. It is said that during 2009-2014, they were subjected to political dictates.
This apart, the nature of clientele or exposure to loans is similar. They are extending loans to infrastructure, steel and power companies. Many companies who have bad debt with PSBs have also said to have taken loans from the private banks.
It has affected profits of many banks. One such bank has the lowest profit of four per cent. The profit of another bank is stated to be the lowest in 11 years.
Private banks apparently lost more in their spree to capture the market of PSBs. Poor economic situation has definitely created problems for all these banks. But that is not the only reason for rising bad debts.
This process is making things difficult for the RBI as it is not only the regulator for PSBs, but for the entire banking sector. Any deviation from normal calls for intervention. The job of Reserve Bank of India does not stop at making the monetary policy. The success of monetary policy is equally its responsibility.
The policy cannot succeed if the banks themselves the basic lubricant for the economy are in a turmoil. It is also true that the turbulence started in 2009, when the Union Government raised the limits of discretionary sanctioning power of Chairmen of banks from Rs100 crore to Rs400 crore.
This apart, it tweaked rules for appointing the board of directors. The chartered accountant member’s position in the board was removed. Besides, as the limit itself was raised, loan application could be cleared by the chairman without seeking approval of the board. This unilateral change was done in the name of easing loan procedure and has created enormous threat to the banking sector.
Earlier, it was believed that such tweaking of rules has only hit the PSBs. But now, it is being realised that it has hit the entire banking sector.
The rules made credit easy virtually without a scrutiny. The chairmen and other bank staff acted arbitrarily. They gave loans without collateral or assessing the capacity to repay. The banks are now in a quandary as to how to recover the huge sums they have virtually doled out. Bank officials forgot that the money did not belong to them. They were no kings to have offered largesse.
The loans now are well-known were diverted to fund other causes. A probe can even reveal whether the money was used for illegal purposes and laundering or not. The situation is more dangerous than it appears to be. This calls for a detailed probe. The banks or the Government cannot restrict itself to mere recovery procedures. Banking rules prohibit any diversion. But it is no secret that most of the 100 large creditors had diverted the funds.
The worst affected were the real estate companies. They not only diverted to supposedly illicit activities but even invested such funds in so called television channels. They virtually made a mockery of freedom of speech. Most media companies also folded up in no time, creating another crisis in the media world. The ramifications of bad debt are wider than can be perceived. Detailed investigation into each of the unpaid portfolio is required. It calls for probe to see how it not only has hit the economy but also has created threat perceptions for national security.
It was public money. The banks are custodians of the money depositors park with them. The banks are known to have diverted fund prior to Independence and some even a few years later. Their erratic behaviour now is once again virtually bringing those memories back.