If the CEOs of public sector banks show undue favour to a client, in circumvention of the laid down procedures, by way of pay-back to their political patrons, they must be held accountable for the wrongdoing
The non-performing assets (NPA) of public sector banks stands at a staggeringly high level of Rs4 lakh crore (constituting nearly 5 per cent of their total loan portfolio). It is roughly one-and-half times the total market cap of these banks. If restructured loans, which have the potential of turning into bad loans, are also counted, this figure would almost double. As against this, the private sector banks have managed a far better performance with a mere Rs47,000 crore in NPA, being just 7 per cent of their market cap.
A report in the Indian Express earlier this year stated that over Rs1 lakh crore had been written off by public sector banks between 2013 and 2015. Even if it were to be a technical provisioning exercise to cleanse the books, it is by any reckoning a huge amount and much larger than the write-offs in the previous years. What is causing thisIJ The Bank Employees Federation General Secretary has alleged nexus between politicians and big corporate houses.
It is quite natural for the public to feel greatly concerned at these reports. After all the Government remains majority shareholder of the public sector banks and the funds handled by them belong to the depositors from the general public. Perception of fraud which was hinted at even by the Supreme Court in its preliminary ruling can be very damaging to public confidence in the country’s financial management and it is the responsibility of the Government to not only clear the air but institute better and fail-safe mechanism to prevent accumulation of such bad debts by the PSU banks in the future.
Kingfisher’s loan default and subsequent escape of Vijay Mallya from the country — leaving his creditors, mainly belonging to the public sector banks bewildere — have cast suspicion on the role of banks in granting loans to big corporate houses. Bank Board Chairman Vinod Rai, who as CAG exposed several scams, has noted that not all loan defaults were wilful since bad business decisions at times could adversely impact the cash flows of a business leading to difficulties in timely repayment of a loan. lenders becoming excessively risk averse surely may not be in the best interests of the economy’s health but the problem of NPA is alarming enough to warrant a serious introspection.
Kingfisher’s case is truly an eye-opener. This airline, which was once the toast of our civil aviation field, owes nearly Rs9,000 crore to a consortium of Indian banks led by State Bank of India. IDBI, which was approached for loan to acquire new planes in 2006, had initially declined the request of Kingfisher, but without much credible explanation it went ahead to provide a loan of Rs900 crore in 2009. Ironically, by that time the airline had accumulated a fairly large debt because of adverse conditions in the aviation sector due to abnormally high fuel costs. Notwithstanding that, the consortium of banks restructured the airline’s debt in November 2010. Ironically, despite known financial difficulties the airline was able to get its brands pledged to the banks for a whopping Rs4,100 crore. The moot point is whether any consideration was given to the chances of recovery of the loan at the time of advancing the loan, as the basic common sense should have dictated, and whether the assessed salvage value of the airline and its assets in case of failure of business plan were at all realistic.
In fact, KC Chakraborty, former RBI Deputy Governor, regards the Kingfisher case as “an example of collective failure” and thinks that it would be very difficult for the banks to recover their money.
A report in DNA on February 16, 2015, suggested, on the basis of documents and forensic reports studied by it, that the PSU banks might “never be able to recover the money loaned to Mallya’s airline.” The public owes an answer from the banks as to why they did not raise the alarm then. Why did they not enforce guarantees attaching pledged shares and properties fast enoughIJ Why did they wake up one whole year later by which time Mallya had already escaped from the countryIJ Does it point to collusionIJ
Charges have been traded at the political level with BJP national secretary Shrikant Sharma alleging that Mallya was a Congress baby and that when his company was on the verge of closure, then PM Manmohan Singh had influenced the banks to give him a package of Rs3,100 crore. The Congress, on the other hand, has accused the BJP Government of not having been able to prevent Mallya’s escape from the country, leaving the banks with no recourse to recover their dues.
Mallya’s case is by no means an exception. Many reputed big business houses are reportedly on the default list. Mohan Guruswamy was quoted in the ANI news as having alleged that there was severe corruption in the banking system and that the politicians and Government officials were involved in granting of loans to business houses. He goes on to accuse the bankers as being the real offenders who actually sanction such potential bad loans. While this may be too harsh a generalisation, the question of culpability and collusion of bankers cannot be dismissed lightly.
Even if one were to accept the role of politicians in the top appointments at the public sector banks, those entrusted with the safe-keeping of public funds must act according to their conscience. There are detailed due diligence requirements as I discovered when applying for a modest housing loan and those must be followed meticulously in every case. If the CEOs of public sector banks show undue favour to a client, in circumvention of the laid down procedures, by way of pay-back to their political patrons, they must be held accountable for the wrongdoing. The argument that they have to act under political pressure and that they are really helpless should not in any way diminish their culpability. The same yardstick would apply to functioning of judges, constitutional authorities and senior Government officials. Just because someone is appointed by the Government of the day, he cannot indulge in a blatant return of favour at public cost. Certainly he cannot be exonerated of any wrongdoing. Individuals holding senior public positions, including those at the helm of financial institutions, have to act with full integrity and sincerity. We should expect nothing less.
In order to restore public confidence, the Government should consider instituting forensic audit of all major loan default/stress cases with a view to determining if there had been any criminal intent in the initial sanctioning of loan. Those found guilty must be brought to book. Simultaneously, the regulatory system needs to be strengthened further as recommended by the current CAG, Shashi Kant Sharma. While it is necessary to protect the bankers from any undue harassment, it is equally important to hold them fully accountable for actions committed by them.
(Virendra Gupta, IFS (retd) served as Indian Ambassador in several countries, including South Africa. Before joining the foreign service, he had a brief stint with State Bank of India.)