Big Defaulters, Easy Loan and a Timely Warning

Abhijit Mukhopadhyay currently works as Senior Economist at Economic Research Foundation, New Delhi. He taught at business schools and also worked at different research based institutes in New Delhi.

Abhijit Mukhopadhyay

Abhijit Mukhopadhyay

While delivering the Third Dr. Verghese Kurien Memorial Lecture at IRMA on November 25, 2014 the RBI Governor Raghuram Rajan raised the uneasy but pertinent issue of big loan default and non-performing assets (NPA). This also becomes important as our the new government has set providing easy credit to the industry as one priority job for themselves. The new government obviously has set itself the goal of providing easy credit to the industry to develop industry and infrastructure. But the point is – at what cost?

Lot of commentators and economists often say that in there are defaults on loans then of course there are Debts Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs). But the reality is something very different. As Raghuram Rajan correctly pointed out – “The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 went a step further by enabling banks and some financial institutions to enforce their security interest and recover dues even without approaching the DRTs. Yet the amount banks recover from defaulted debt is both meagre and long delayed. The amount recovered from cases decided in 2013-14 under DRTs was Rs. 30590 crore while the outstanding value of debt sought to be recovered was a huge Rs. 2,36,600 crore. Thus recovery was only 13% of the amount at stake. Worse, even though the law indicates that cases before the DRT should be disposed off in 6 months, only about a fourth of the cases pending at the beginning of the year are disposed off during the year – suggesting a four year wait even if the tribunals focus only on old cases. However, in 2013-14, the number of new cases filed during the year was about one and a half times the cases disposed off during the year. Thus backlogs and delays are growing, not coming down.”

Raghuram Rajan (photo: IMF/wiki)

Raghuram Rajan (photo: IMF/wiki)

This succinctly covers the problem as far as NPAs are concerned. In simple language, only big industries or big capitalists are able to access loans from the banks while those who are unable to provide collateral are finding no access to loans. Same is the story for medium, smaller farmers and other small petty business persons. But when there are defaults by those very big borrowers it is often found that the collateral provided by them are unable to fully recover their loan in case of a default. On top of that, bigger business have the wherewithal to fight such cases at different levels of judiciary while many small and medium business do not. That implies shifting out of smaller business from the credit accessibility, and this in turn also means concentration of wealth in favour of the big business.

It is not that every big business defaults on loan but it is also equally clear from the statistics that bulk of the NPAs are with bigger business only. There are other aspects also. Bad loans are more in the case of public sector banks with respect to private sector banks. As on March 31, 2013, the gross non-performing assets (NPAs) or simply put the bad loans, of public sector banks, had stood at 3.63% of the total advances. Latest data from the finance ministry show that the bad loans of public sector banks as on September 30, 2014, stood at 5.32% of the total advances. The absolute number was at Rs 2,43,043 crore. During the same period the bad loans of private sector banks was more or less constant at 1.8% of total advances. Interestingly, public sector banks accounted for over 90% of bad loans in 2013-2014 (i.e. between April 1, 2013 and March 31, 2014).

So, it is evident that most of the pressure of these NPAs are on the public sector banks. The insistence of the government to provide large credit to business is more effective for the public sector banks, not on the private sector banks. The recent SBI MoU with Adani for its Australian coal mine project is also indicative of that.

Though the timely warning given by the RBI Governor should be applauded and lauded for right intention and reasons, there are some uncomfortable questions those arise towards India’s central bank also. While in recent times under Rajan’s leadership the RBI has tried to minimise sub-prime loans, the measures were mainly directed towards consumer loan. But why steps were not taken against the mounting NPAs and particularly by those big business? If number of DRTs or DRATs were not adequate, then increasing the number of them should have been made much earlier (Rajan prescribed this in his IRMA speech)? When there had been so much talk of central bank independence so that the central bank does not have to suffer for unwise and indiscriminate fiscal spending of the central government, then why also not talk about commercial banks’ independence (particularly public sector banks) of refusing credit to anybody? And to ensure no pressure is created on such cases – what are the possible remedies that one can take, apart from building up solid project appraisal system?

Unless these questions are not addressed, indiscriminate provision of easy credit to big business to develop industry and infrastructure is going to boomerang on the economy – sooner or later.