Not exactly serendipitously, but January 2018 had begun on a quiet note for the banking sector. Within a month, however, as the Nirav Modi affair roiled Punjab National Bank, events piled up through the year culminating in the change of the Governor of the Reserve Bank of India at the end of the year. Except possibly the year of nationalisation of 14 banks in 1969, no other year compares with the changes in the sector that have happened in 2018.
It was coming, though. The flurry of events threw up the basic problem of banks. For decades these banks had dished out loans and omitted to ask the borrowers to pay back.
To stretch the story back, the only difference that nationalisation had introduced was about who gave the orders to give loans. It was the political executive instead of the erstwhile industrialists. The pile of non-performing assets told the story in numbers.
Through this year as more sordid details tumbled out, the bank owner and the Government hunted for excuses while the regulator, caught equally napping, pointed fingers at the owner.
The details were the follow through of the asset quality review that banks were forced to do in 2015 by former RBI Governor Raghuram Rajan. He had asked them to run a fine tooth comb through the tangled loan books and share the outcome.
The State-owned banks got into this mess since they have always looked up to their owner to advise them on whom to lend to. There is a disconnect between the top management of the banks and their ownership. The Government, for instance, has for years told them to offer 40 per cent of their loan books to the priority sector. The sector includes agriculture, small scale industries and just about anything else which is the flavour of the day. It is a disastrous policy.
Loans to the small-scale sector or farmers is necessary but not when practised as a one-size-fits-all. The banks should have been encouraged to set targets and create customised solutions. The difference in capacity between say SBI and that of Dena Bank should have been recognised. None of the banks offered a good reason to their officers why they should scour the countryside looking for farmers to lend to.
If the officers had instead been rewarded for their initiative and in their subsequent postings placed at key positions in credit departments offering loans to the corporate sector, the results would have been impressive. No bank tried anything of this sort for decades. Instead, the banks were encouraged to create shortcuts.
Tenant farmers who needed the loans but did not have the land to offer as collateral found the banks were not interested. Bank credit to this sector never exceeded 10 per cent. Successive Governments made up the difference by asking the banks to subscribe to the bonds issued by the Nabard. It is gaming of the system that made the loan book to the farmers look impressive.
This weakness in curating a promising army of motivated bank employees with a system of rewards encouraged the banks to readily adopt directed lending in their business with industry.
While the staff do get training in reading the balance sheets of companies, what they do not get to read is the degree of cosiness of the business with the political leadership of the day. If a company knows it can extract a better deal from the banks by engaging with the party in power than with the chairman of the bank who is just an employee, why wouldn’t it.
In cases like that of Nirav Modi, Vijay Mallya, or that of IL&FS, it is a combination of lack of due diligence by banks and some element of nudge from New Delhi that did the damage.
It is difficult to assert which element played a larger part in the mess, but the trend never changes. For instance, there is no doubt that banks anywhere face an asset liability mismatch when they lend to infrastructure projects, but NPAs occur when the officers are not motivated to point out when a loan book for such project should be closed. In Indian State-owned banks, the employees would opt for ever greening instead and leave the mess for the next person in charge of the desk to sort out.
Can the load of bad loans from banks cost an election victory? With India squarely in the middle of the election, this is the elephant in the room.
Eleven of the 19 State-owned banks are in the equivalent of intensive care unit, the prompt corrective action (PCA) framework. Yet by March 2019, their ratio of non-performing assets is likely to worsen to 22.3 per cent, according to an RBI report. The total NPA with Indian banks is estimated at Rs 10.2 trillion. The provisioning needs for these loans has eroded the capital base of the banks, especially the 11 banks in the PCA . The Government data says that the Finance Ministry has recapitalised banks for Rs 1.69 trillion through budget support and mobilisation of capital from the market, including the latest tranche announced.
As these banks have stopped lending, it has soured the mood among the borrowers leading to cascading problem of retrenchment of employees. Unlike the US where companies depend on equity markets, Indian industry depends on bank loans to finance all of their capital. When those taps are turned off, industry sputters especially the small and micro enterprise sector.
Worsening of the NPA has two effects. First, it makes loans go dry, mostly for those sectors which can ill afford such withdrawals. Second, the lower disbursal of credit impacts the growth rate of the economy. Since the ownership of most of the banks is with the Government, it also creates a political problem and it is election season.
In the New Year these concerns could shape the nature of political discourse in the General Election.
pnb master scandal
On February 14 this year, the state-run lender PNB shocked the entire banking industry of India by revealing that it had been defrauded by Rs 11,400 crore allegedly by billionaire jeweller Nirav Modi, his family members and business partner Mehul Choksi, owner of the Gitanjali Gems at PNB's Brady House Branch in Mumbai. Following the scam, employees of PNB including people at the general manager level were suspended from their post for their suspected involvement in the biggest scam in the Indian banking sector. Also, the government has revoked passports of Nirav Modi and Mehul Choksi.
Rs 3,700 Rotomac fraud unearthed after the sensational PNB scam. Kanpur based Rotomac Global is being probed by the CBI and Enforcement Directorate (ED) for allegedly cheating a consortium of seven banks of Rs 3,700 crore. The investigation agency filed case against Vikram Kothari and Rahul Kothari, directors of the business group for misusing credit sanctions provided by Bank of Baroda (BoB), the member of consortium banks at its International Business Branch (IBB) at The Mall Kanpur to the tune of Rs 456.63 crore.
SBI gold case
State Bank of India (SBI) is at the forefront of a bank scam involving jewellery network Kanishk Gold Pvt Ltd (KGPL). The KGPL has been accused of defrauding a consortium of 14 banks amounting Rs 824.15 crore bank fraud led by the SBI. The Enforcement Directorate (ED) and CBI registered a case against Kanishk Gold.
RP Infosystem fabrication
In January the CBI has booked two directors of R P Info Systems and its directors for allegedly cheating a consortium of banks, including PNB, SBI and Canara Bank to the tune of Rs 515.15 crore. The banks alleged that loans were taken on the basis of fabricated documents.
PNB 91 million
After witnessing a scam of Rs 12,000 crore allegedly committed by Nirav Modi, the PNB has unearthed another 91 million fraud in March. It involves officials of a little-known company called Chandri Paper and Allied Products Pvt Ltd. The fraud has been spotted at the PNB's Brady House Branch in Mumbai where the Nirav Modi scam had unfolded.
Karnataka working capital case
Private sector lender Karnataka Bank on March 28 reported a fraud worth Rs 86.47 crore in the fund based working capital facilities extended to Gitanjali Gems Limited, the jewelry network which has been under the scanner in connection to the alleged involvement of the promoter Mehul Choksi in the mega banking scam.
On March first week the Central Bureau of Investigation (CBI) has filed a disproportionate assets (DA) case against Archana Bhargava, former chairperson and managing director of United Bank of India (UBI). The CBI alleges that Archana Bhargava acquired movable and immovable assets disproportionate to her income between 2004 and 2014.
(The writer is Senior journalist & writer)