By G. Srinivasan
In the mostly washed-out post-budget session of Parliament, a revealing reply was provided on the well-meant Asset Quality Review (AQR) initiative of the former RBI governor and celebrated economist Raghuram G Rajan on a query on the record write-off of non-performing loans (NPAs) by the public sector banks (PSBs) amounting to 81,683 crore of rupees in a single year in 2016-17, by far the biggest over the past five years.
Without mincing words, Minister of State for Finance Shiv Pratap Shukla said in a written answer to a query in the Lok Sabha on April 6 that following the introduction of the AQR in 2015 and transparent recognition of restructured loans as NPAs, gross NPAs of PSBs swelled by a hefty 4,54,000 crore of rupees between March 2015 and June 2017. PSBs, he said, accordingly made upfront and due provision for expected loss on such stressed loans, of a total amount of Rs 3,79,080 crore between March 2014 and June 2017, which was well-nigh twice the provision of 1,96,937 crore of rupees made in the preceding decade!. It is made pellucid that amounts written off in the fiscal year ending in March 2017 and the preceding few years are substantially on account of such stressed accounts of earlier years, which have been fully provisioned following the AQR.
It is further clarified by way of edification to those who might frown upon taxpayers’ money being doled out sans any qualms, that “writing-off of non-performing assets is a regular exercise conducted by banks to clean-up their balance sheet and achieving taxation efficiency”. Besides, it is claimed elliptically that writing off of loans is done for “tax benefit and capital optimization”. Lest the finer feelings of the harassed taxpayers should be hurt, it is added by way of tame reassurance that “borrowers of such written off loans continue to be liable for repayment”. It is added that recovery of dues supervenes on ongoing basis under legal mechanisms, which include the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) and Debt Recovery Tribunals (DRTs). More fittingly, the Insolvency and Bankruptcy Code (IBC) which came into effect last year, is the most significant and landmark legislation as it would put many large borrowers, including corporate firms and smaller enterprises, to undergo liquidation under the IBC so that the proceeds could be part-used to pay back banks and make recovery not a mockery as has been the case hitherto! Though write-off may seem apparently not beneficial to borrowers, the long delay and the run-down of the assets meant that the recovery is going to be paltry and the haircuts to be endured by the lending banks too awkward to escape them from a real loss of face!
It is germane to note that Minister of State for Finance Pratap Shukla admitted in the Rajya Sabha that during the last five financial years from April 1, 2013 till February 22, 2018, there were 13,643 cases of bank frauds, involving an aggregate sum of 52,717 crore of rupees based on RBI data.
In response to another question subsequently, the minister said that as per RBI inputs, Punjab National Bank (PNB) reported fraudulent issue of Letters of Undertakings/Foreign Letters of Credit (FLCs) for payments of import bills, amounting to Rs 12,967.86 crore, to RBI through its Fraud Monitoring Reporting System. This was the case of a notorious maverick diamond merchant Nirav Modi, who took the facile recourse to LoUs/FLCs to defraud the bank substantially and solidly and flew away to a safe haven before his criminality could be unearthed! It was subsequently established that the lack of integration between the CBS (Core Banking Solution) and SWIFT (Society for Worldwide Interbank Financial Telecommunication) allowed PNB officials to cheat and be in league with the firm that perfected the art of defrauding the bank! In the wake of the PNB scam, the government had to abolish the due trading mechanism – LoUs for exporters importing inputs/intermediates, causing every other manufacturer-exporter avoidable anxiety and perpetual trouble.
No sooner the dust kicked by the PNB scam settled than another one had erupted in the form of a conflict of interest of the private bank ICICI’s CEO Chandra Kochhar for a loan given to Videocon from whose promoter an immediate family member of Kochhar may have gained! In both the cases, involving a PSB and a private sector bank, the system controller, the RBI, could not spot out the shady operations right in time before they get festered enough to embarrass the whole nation. What makes one aghast is that ICICI is assigned by the RBI as a Systemically Important Bank (SIB) which by its very appellation meant that if the bank gets into rough weather, the whole financial edifice of the nation could be in peril. This naturally puts the onus on the RBI to be extra vigilant in its supervisory function of the SIBs. Did not the supervisor get access to its own channels to ensure that the top echelons in the SIBs do not have conflict of interest or feather their own nest using their exalted status in the institution they serve? This is also analogous to the anomalous laxity in the PNB case where the supervisor RBI was supine enough not to be alert to the absence of due and crucial communication between the CBS and the SWIFT system that let the errant elements within the bank to collude with a greedy customer to hoodwink the bank!
RBI could not merely be content with stating that “compliance with RBI’s instructions is the bank’s responsibility and the Compliance Officer in the bank monitors the same”. It is trusting your subject too much hoping that they would all be above reproach but when the chips are down with a few bad inside elements playing into the hands of a master cheat client, things get hotter for both the bank as also the regulator as in this case so glaringly and gallingly demonstrates to the public who have put their hard-earned money by way of deposits into these universal banks!
The sole and whole regulator of the banking sector must perforce have to crack the whip to bring an iota of seriousness in the conduct of the affairs of the PSBs and also the emerging private banks. RBI has delivered well on the inflation-targeting core agenda to keep its image glimmering albeit the diatribe by critics who said its inflation forecasting leaves a lot to be desired. It is time the apex bank focused itself more on its regulatory role in right earnest so that the affairs of the banking industry would not turn scurrilous and risk compromising the rights of genuine stakeholders! (IPA Service)