Atma Ram Kejariwal
While lending money to borrowers, Banks and Financial Institutions (FI), are supposed to ensure themself that money so lent will be paid back by the borrower with interest in due time. Required guidelines are in place. Banks and institutions appoint their nominees in the board of large borrowers as Directors. These Directors are supposed to be vigilant and are required to raise alarms when operations are likely to go off the rails. In spite of all these guidelines and procedures, loans given to corporate are becoming Non Performing Assets, (NPA), at an accelerated speed.
NPA can be defined as: A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The NPA is therefore not yielding any income to the lender in the form of principal and interest payments.
In Corporate Debt Restructuring, (CDR). a borrower conveys to lender its inability to honour commitment to pay interest and principal repayment. Standard reasons like change in market conditions, natural calamity are cited. Lender and borrowers sit together in an air-conditioned room, eat snacks, drink tea and within few minutes agree to restructure loans, giving major concession to borrower. Some time the value of difference between original commitment and revised commitment after CDR runs into hundreds of crores of rupees. To justify CDR, standard reason given by the lender is that without CDR the loan will become NPA. Neither borrowers think about its original commitment, morality nor lender analyse failure of its Director nominated to Board of Borrowers to raise an alarm. The activities which take place in between period of filing application for CDR and its acceptance is anybody’s guess.
The alarming situation of NPA for PSU banks alone can be judged from a written reply given by the Minister of State for Finance Namo Narain Meena in the Lok Sabha that the gross NPA of PSU Banks stood at Rs. 1,23,462 crore as on June end 2012, which was Rs. 1.12 lakh crore at close of last financial year 2011-2012. It translates that bad loans of PSU banks have gone up by nearly Rs 11,000 crore in just three months, an average of Rs 120 crore per day or Rs. 1 per day per Indian citizen. The ultimate sufferer is an ordinary citizen who trusts PSU banks and deposit his/her hard earned money and these banks with single stroke of pen forgo hundred of crores of rupee per day. Neither the banks nor the borrowers are sufferer.
The borrowers are happier lot as they gets more leverage to continue their mismanagement, non performance. The employees of borrower who handles CDR cases are rewarded by their employers for excellent job of managing banks and arranging CDR or in other terms stealing money from pockets of ordinary citizen. Even the owners/promoters/top executives of such borrowers continue to draw increasing emoluments year after year in spite of continued poor performance. Details in balance sheets reveal all information though figure mentioned in balance sheet about emoluments is much less than total cost to the company. One can also observe many family members on roll of same company drawing very high emoluments. It is time for RBI, SEBI and other such authorities to re-look into guide lines for emoluments of Directors and other top executives of such companies.
As per one report the quality of credit in the current system is worsening to an alarming level. At the end of March 2013, the total value of restructured loans in Indian banking system crossed Rs 2.2 trillion or Rs. 2.2 lakh crore Restructured loans are not just the fallout of indiscriminate lending to priority sector. In fact most big ticket restructured loans are cases of genuinely poor credit quality assessment by the lenders. That is the reason not just public sector but several private sector lenders too have shown deterioration in credit quality. Thus the banking sector is struggling to come to terms with historically high proportion of bad loans. The graph below tells the true story. Unfortunately this is also the period coinciding with UPA-II tenure.
Here the point is simple; when a corporate or high worth individual apply for loan, certain procedures are supposed to be followed. The borrower prepares a detailed report of its project considering all possible scenario in future, keep required contingencies and present the report to lender, generally consortium of Banks and FIs. The lenders are supposed to satisfy that money so lent will be recovered along with interest. Interest rate and other terms and conditions are discussed and agreed upon considering credit rating of borrower. In the report and presentation the borrower commits about better and efficient management. List of key persons are furnished. Some sort of guarantee is furnished to lender by borrower. All these procedures and requirements are to ensure safety of lender’s money. The borrower binds itself legally and morally to honour all commitments. It is expected from lender to take a judicious approach and not carried away by project presentations, so called reputation of borrower, should not be lured by other considerations, should not bow down to directives/wishes of political masters. In many cases it has been seen that lender do not take judicious approach. Hundreds of examples are available. Take example of Harshad Mehta case. Banks were in queue to lend money to his companies. We have seen the results. Very recently case of Kingfisher Airlines is live. A father gifts the Airline to his son on birthday and the Airline goes bankrupt in couple of years. These are only tip of iceberg; the iceberg itself is of gigantic size.
Many a time poor credit growth becomes a matter of concern for authorities. But this does not justify poor credit quality assessment by the lenders. Lender’s main consideration should be to safe guard depositor’s money. One can find many Black Holes where one can put any amount of money and it will suck all the money put in to it. In aviation sector one can see Air India and Kingfisher Airlines such Black Holes. Every sector has such Black Holes. Such Black Holes are to be identified and should be barred for lending.
Consider case of an ordinary Indian poor farmer. He needs money for forthcoming crop, applies loan to bank/institution. He does not have a pool of talented professionals on his roll. He cannot prepare a detailed report; he cannot forecast about next couple of years. Monsoon is the only variable factor for him, which is not in his acontrol. Many times banks/institutions refuses loan to him, he has no option but to approach private lenders for loan. He has to mortgage his land or small house to take loan. If Monsoon fails he is ruined, his dreams to meet minimum essential requirement of his family shatters. The lender goes after his neck. He has no solution with him. Morally he feels guilty; with out his any fault. Unfortunately this leads to extreme step like suicide by some of the farmers. In most cases the loan amount is less than Rs one lakh.
Contrary to this, in case of corporate, the loan amount is in tens, hundreds or even thousands of crores of rupees. The lender has limited avenues to recover money from such defaulters. Common reasons of default are: poor management, siphoning of money, greed to undertake projects beyond their capability, experience and expertise; avoidable extra overheads, etc. All these factors are in borrower’s hands, unlike our poor farmer, yet one has to come across a single case where such individuals felt morally ashamed, leave aside extreme step a poor farmer takes.
It is the right time for RBI, SEBI and other such authorities to revise guidelines and checks for lenders (persons responsible for poor credit quality assessment, lender’s nominated passive directors in these companies) with some penalty provisions as: with holding promotions and increments . For default borrowers, cap on their remunerations and perks, overheads, employment to relatives at senior posts with high remunerations, removal from management function, etc should be considered and implemented.