Banks and Borrowers – The Unholy Alliance

When the news spread that the Central Bureau of Investigation (CBI) arrested SK Jain, Chairman and Managing Director of Syndicate Bank, for allegedly taking a bribe of INR 50 lakh for raising the credit limit of two companies, some people were shocked.

Weren’t these government banks supposed to be those friendly neighbourhood banks where one could walk in and feel at ease? These banks, which often appeared as if they were drawing a cautious line between the fast pacing advancement and the slow past, seemed to have an air of simplicity and honesty about them. The employees, many of whom would be middle-aged, typing meticulously into their computers and cracking jokes over a cup of tea served by a peon, often led one to believe these banks could never fault.

So, is it possible…really possible that a nationalised bank like the Syndicate Bank could have had a nexus with a company and could have played an important role to promote bad loans?

Data has it that in the year 2013-14, bad loans or Non Performing Assets (NPA), as they are called, increased by 35.2 percent amounting to INR 2.43 lakh crore. The 40 listed banks added about INR 63,386 crore to their gross NPA till December 2013.

Let us try to understand a little bit more about bad loans, its causes and the steps that have been taken to prevent them.

What are bad loans?

In a layman’s language, a loan is termed as a bad loan when all attempts to recover the loan amount from the bor rower remains futile.

What usually causes the loans to turn bad?

Slow economy is always termed as the reason behind bad loans. When the economy is slowing down, there is a sharp increase in the rate of interest due to which corporates and individuals are unable to repay the loan. During these times, it is taken for granted that the loans would turn bad. Even the government is open to the idea that when there is recession, there will be a surge in the number of bad loans.

Is economy always the culprit? If no, then what are the other reasons that lead to bad loans?

No, economy cannot be the culprit all the time. The other reasons may be that the banks are lenient in their approach and may be adopting a wait and watch strategy till they move on to recover the loans. Or the banks continue giving loans despite the financial status of the corporates or the individuals desperately blinking ‘red.’ In other cases, the banks may not have strict processes and norms through which the defaulters can be kept at bay. Like for instance, a defaulter may surface with new credentials and deal with the same bank, and the banks may have no means to find out the history of default. Last but not the least, bad loans may arise due to malpractices adopted by the bank, where there is a nexus between the bank and the borrower. While, most of the cases cited here can be tackled to a certain extent by adopting stricter rules and regulations, the case of nexus looks difficult to resolve. This nexus, which when unintentional can lead to huge losses and when intentional can break the economy of a country. Either way, the nation stands to suffer.

Some cases of nexus between banks, borrowers and bad loans

In the above mentioned case, where the Chairman and Managing Director of Syndicate Bank took a bribe to raise the loan limit, there clearly existed a nexus. The Chairman knew that the companies may not be in a position to repay the loan, yet he planned to sanction the loan if his palms were greased.

Another prominent case that is well-known to everybody is the Kingfisher case where huge loans have turned bad. With the recent CBI charge against the IDBI bank, the case highlights an important aspect – why did IDBI sanction loan to Kingfisher when it was clear that it would be a financial risk? The bank knew the stress other lenders were going through, then why did the bank decide to take this exposure? Here, the nexus may not have been intentional, meaning the bank may have sanctioned the loan to bail out the company, but look where it has led to.

Another angle to this case is that in 2013, Kingfisher’s owner Vijay Mallya raised INR 6,500 crore by selling 27 percent stake of United Spirits, the largest liquor company in India, to Diageo. This deal happened when Kingfisher was neck deep in debt, but to the surprise of everyone, this money was not used to pay off the debt. The airline’s debt today stands at INR 6300 crore. This brings us to the question – Did Mallya actually intend to pay off the loan?

This is not the first of its kind, the CBI has in hand about 30 such cases, many of them involving state banks. This brings us to the fact that a cleanup of the banking system is urgently required and the government has already undertaken steps in this direction.

Proposed steps to clean up the banking system

• The Reserve Bank of India had called for stricter norms to handle bad loans. The recent crackdown by the CBI on Syndicate Bank chief is a sign that the government is very serious about this issue and will walk the extra mile in cleaning up the banking system.
• Banks are likely to get stricter and aggressive on the processes involved in sanctioning the loans and also retrieving the loans. The RBI Governor Raghuram Rajan had said that they are trying to ensure that ‘wilful’ defaulters are prevented from accessing funds of any kind – not just from the banks but from markets even. This, he said, would instil some caution in them. (Wilful defaulters are those who intentionally default.) Currently, these types of defaulters are only debarred from banks after they default, but can still raise money from the capital markets.
• The RBI is also planning to create a list of ‘non-cooperative’ borrowers and will make it tough and expensive for them to borrow from the banks. Non-cooperative borrowers are those who hold up collections at every step using all the instruments. They may not be considered as criminals but they would definitely be termed as a ‘financial risk.’ Making it tougher and expensive for them to obtain loans in the future may make them think twice before they hold up the collections.
• To enable banks to recover money from defaulters, the government is also looking at amending the Debt Recovery Act and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.


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