On the Crisis in Public Sector Banks

Comrade Devidas R Tuljapurkar (DRT), General Secretary, Maharashtra State Bank Employees Federation (MSBEF) and Joint Secretary, All India Bank Employees Association (AIBEA), spoke to Mazdoor Ekta Lehar (MEL) about the crisis in the Public Sector Banks.

We reproduce below some of the important issues he raised:

MEL: Recently it has been in the news that the RBI has admitted that Rs 68,607 crores from the top 50 willful defaulters of the Public Sector Banks (PSBs) has been written off. The reply by RBI was given to an RTI query filed by an activist. But when this question had been put to the Finance Minister, Nirmala Sitharaman in Parliament in the last Budget Session on February 16th 2020, she had refused to give an answer. What is your view on this?

DRT: These are all big corporate accounts whose dues have been written off. The standard reply from RBI and the Government is that this is a balance sheet exercise and the banks can still recover those dues.

However the actual fact is that many of the above 50 cases have been referred to National Company Law Tribunal (NCLT) under Insolvency & Bankruptcy Code (IBC). It is also a fact that the recovery rate is less than 50 percent for the cases referred to this Tribunal. In some of the cases it is even less than 10 percent! This loss of money which was loaned out to the corporates is compensated by the Central Government by infusing fresh capital in those banks. It is the ordinary people’s money which is deposited in the banks which is given out as loans to these big corporates. When they default on repayment, it is either the ordinary people or the Central government who are at loss. The Central Government earns its money from taxing the people and hence finally it is the people who have to bear the entire cost of the fraudulent activities of the corporates.

The PSB’s have written off a total of Rs 6,00,969 Crores of outstanding loans from 2014-15 to 2018-19. The share of agriculture in this is 7.16 % while the share of trade & services is 27.69%. The rest of the defaulters, that is 65.15% are mainly from big corporates. Among these corporate defaulters, there are 71 corporates who had loans of more than Rs 500 Crores and whose loans were written off. The total write-off of these 71 big corporates is Rs 1,07,000 Crores. Then there are 980 corporates who had loans of more than 100 Crores and whose loans were written off. The total write off of these 980 corporates is Rs 2,75,000 Crores. Recovery from these written off corporate accounts is insignificant. All these loans that were written off were sanctioned by banks under successive governments, both Congress and BJP, without any exceptions.

The outstanding Non Performing Assets (NPA’s) of the PSB’s as of March 2019 is Rs 8,15,678 Crores which does not include the above Rs 6 lakh crores which have been written off! When a big corporate defaults in payment of the loan, then the loan is categorised as an NPA. As against these outstanding NPA’s and written off loans, the recovery for the financial year 2019 was Rs 1,26,085 Crores i.e. 15.5 % in relation to the above outstanding NPA. This recovery was through various agencies , namely, Lok Adalat – 5.3 %, Debt Recovery Tribunal (DRT) – 3.5 %, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act , 2002 (SARFAESI)- 14.5 % and Insolvency and Bankruptcy Code – 42.5 %. Under IBC the average loss in recovery or “haircut” taken by the PSB’s is 52% for the first 23 corporate accounts in the list of defaulters sent to RBI, while in 4 cases “haircut” is more than 90 %. In one case it is above 99 percent!

When a corporate fails to pay the instalment for 90 days from the date when repayment was due, the banks have to make a provision for a loss of 15% of the outstanding amount. In the second year if payment is not made, a provision for a further loss of 25% of the outstanding amount is made. Similarly in 3rd year if payment is not done then a further provision for a loss of 50% is made and in the 5th year a provision for a loss of 100 % is made and the loan is written off. In case of fraud accounts and accounts where there is no security then in the first year itself it will be categorised as loss asset and will attract 100% loss provision. Any recovery of the loan that takes place after this adds to the banks income (because the entire loan has already been technically written off after 5 years and provision for its loss has already been made in the accounts of the bank) and so banks are willing to give haircut to any extent!

This is the resolution process which is actually practiced. Thus IBC in effect bails out corporate borrowers and they can continue their business while paying back only a small fraction of what they borrowed. This means that though technically RBI claims that write off is not a loan waiver but in practice it means the same! On the other hand if a firm is declared Insolvent/Bankrupt then the recovery rate is only 5 percent!

The above applies only to big corporate loan account holders. If a small businessman, or self-employed worker (auto rickshaw, taxi etc) or a peasant defaults on his payment, immediately the bank will expropriate his assets to force loan recovery. Banks can write off these loans also but they are not keen on doing it. This shows clearly that there are two types of recovery procedures, one for big corporate borrowers and one for small and marginal borrowers. The recovery process in Public Sector Banks is loaded entirely in favour of the big corporate borrowers and enables them to continue their businesses even after defaulting on their loan repayments.

The Public Sector Banks are showing a reduction in their NPA’s in the last couple of years and this has taken place mainly by (A) writing off loans which is a sacrifice by the banks and (B) “recovery” of loans with hair cut ranging from 51 percent to 99 percent which is again a sacrifice by the banks.

All this has resulted in erosion of profits and loss of capital by the PSB’s. In order to comply with regulatory capital requirements the government has infused more than 3 lakh Crores into the PSB’s over the last 7 years. This is nothing short of cross subsidisation for corporate loan write offs. Banks have used this money to provide for NPA’s and thus to reduce Net NPA’s in order to come out of RBI’s Prompt Corrective Action (PCA) framework. Those Banks with large amount of NPA’s are put under PCA and their lending is restricted.

Another method the banks are using to cover the losses from the large NPA’s is to increase service charges on many items provided by the banks as well as to reduce the interest rates on savings banks deposits. Thus it is the common man who is shouldering the burden of non-payment of loans by the corporates.

Why should the common man pay? The government and the RBI is trying to hide the real facts by using terminologies such as Balance Sheet Exercise etc. The corporate friendly model and the policy of privatization, globalization and liberalization followed by successive governments, whether Congress led or BJP led, has been shown to be a complete failure. For this the common working people are made to pay a very heavy price. Today, it is more than clear that it is not privatization that is the solution but social control of the means of production and banking services. That is the change which is required for the well-being of all members of society, especially the working population.

We need to fight for an entirely new Banking policy which should aim for “People’s Money for Peoples Welfare “.

MEL: Thank you for your interview, Comrade Tuljapurkar.

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