Recovering loans, people’s trust

| | in Oped
Recovering loans, people’s trust

In the name of ease of doing business, it appears that banks are being lax in granting loans. Also, recovery and monitoring mechanism are abysmal

Frauds galore are rocking banks in India. This is what comes from data released by the Reserve Bank of India (RBI). The banks lost Rs 61,260 crore in loan frauds in the last five years, between 2012 and 2017.

Even the numbers of frauds are a whopping 8,670, according to RBI and 25,600, as per a statement of Electronics and Information Technology minister Ravi Shankar Prasad in the Parliament. It indicates that loan taking is easy and defaulting is easier.

As also the known non-performing assets (NPA) of over Rs six lakh crore and if the written off part is included over Rs 12 lakh crore. If Prime Minister Narendra Modi’s recent statement of 82 per cent NPAs is included, it means most large loans granted are not repaid. The poor depositors’ savings is an easy prey. The public money seems is meant to be looted.

The PNB’s Rs 11,400 crore scam and Rotomac owner Vikram Kothari’s Rs 3,700 crore “default” have wider ramifications. Apart many other banks possibly have hidden scams, may be some linked to stocks. 

Frauds are not restricted to large public sector banks (PSB) and private banks. The rural and cooperative banks all over the country have several instances of swindling. In 2014, the National Bank for Agriculture and Rural Development (NABARD) stated that in 2012-13 regional rural banks had lost Rs 727.54 crore in loan frauds and Rs 611.77 crore in 2011-12. It said that the banks were not reporting high value frauds and the actual amount could be higher.

The cooperative banks are prone to frauds all over. The exact estimates are not available. Overall, the entire banking sector is passing through a crisis and needs a holistic solution.

The PSBs are in severe distress. It is running on virtual Government recapitalisation. The budgetary expenditure on recapitalisation totaled Rs 81,200 crore between 2000-01 and 2014-15. In October, 2017, the Government announced the decision to recapitalise PSBs with Rs 2.11 lakh crore.

This would be funded through budgetary provisions of Rs 18,139 crore and the sale of Rs 1.35 lakh crore. The balance would be raised by the banks by selling the Government’s stake. It also means in future the government would get fewer dividends.

The ‘sin’ of PSBs is that they lent heavily to infrastructure projects that never took off. The way forward is to provide for loan losses, infuse capital, fix their management and governance and look to revive lending.

There are real estate projects, which diverted the funds for other purposes. Once the loan is granted banks virtually have no control. So some like Jaypee’s despite default of over Rs 95,000 crore for years was not shown as NPAs.

A ‘bailout’ happens when a bank has failed. In regulatory terms, this means the bank’s capital adequacy —the ratio of capital to risk-weighted assets — fall below the regulatory norm. This norm is eight per cent as per the Basel norms. The RBI prefers to keep the norm one per cent above the Basel standards, at nine per cent. It is kept at a higher level of 14 per cent so that even if a few loans turn bad, they do not fall below the capital requirement to be able to continue lending.

The stress tests conducted by International Monetary Fund (IMF) experts covered the 15 largest banks, including 12 PSBs, which account for 71 per cent of the banking sector assets. RBI’s stress tests also show a rise in NPAs.

Be it IMF or RBI, they always understate the bank crisis. They do not easily reveal the names of the defaulters. In the case of Punjab National Bank (PNB) scam, it is stated that Nirav Modi had chosen a Mumbai branch which was not linked to the online system called Society for Worldwide Interbank Financial Telecommunication (SWIFT), which could have made detection easier.

Interestingly enough the modus operandi is simple. Loans are raised in small tranches many times. Sometimes a part is paid and the majority is adjusted through book “adjustments”. The figures thus look less staggering and unless closely scrutinised the reality is difficult to detect.

Dwelling on factors for rural banks, NABARD said one of the reasons was the absence of well documented system with defined authority and responsibility at each stage of operation. The internal checks and controls are inadequate.

The NABARD said management of some banks was not serious in getting the pending fraud cases reviewed. It almost fits PNB, which did not discuss the Nirav Modi fraud at its board meeting. Many banks even do not have fraud risk group.

Thus, various RBI and other regulators’ operations indicate that the concern for safeguarding poor man’s deposits is the least. There is also no estimate as to how much actually have been lost to loan frauds and other scams.

The only safety is possibly that most banks remain Government entities and it goes on pumping money to keep them afloat.

The depositors need to rethink and so do the Government whether people should be forced to transact through banks. It is a big risk. Since online banking has started, many are known to have lost their money to various online swindling.

Would Aadhar linking help? The Government must ask the banks to stop it for the present as many doubts still remain about secure online transaction. Those having credit despite Aadhar linkage can get away with loan frauds. Why should it be imposed on 99 plus per cent honest depositors?

Complicating procedures do not help the depositors, the virtual owners of the banks. In the name of ease of doing business, it appears the banks are being lax in granting loans. Their recovery and monitoring mechanism is weak.

Making loans cheaper during the past few years have only increased demand for loans and higher defrauding one way or the other.

No second tranche be should be released unless 90 per cent of the first one is repaid.

 It is a double whammy for the depositors. They are losing on both counts — less interest accrual, the increased risk of frauds, higher charges and erosion of the value.

The indirect impact is on the whole economy. It weakens it, hits international rating and affects perception.

While even an education or farmers’ loan go through so many stringent procedures, how come billion rupee loans are granted virtually without collateral? The banks should be told to put up names online of those taking high-value credits.

A farmer can be named and shamed. Why not all those big creditors? Let the trust in banks be restored.

(The writer is a senior journalist)

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