The Big Bank Scam?

For over 5 years, economists and analysts have issued numerous warnings on the plaguing bad loans problem in the Indian Banking sector. Although the bad loan problem cropped up as early as 2011, the first bold measure against this banking ill was undertook by former RBI governor Dr.Raghuram Rajan in December 2015. Since then the fight against the bad loans has only become stronger.

Bank Jargon
  • NPA: Non Performing Assets - Loans given out by banks for which interest/principal is not paid by the borrower (loan default)
  • Provisioning: Setting aside money to cover for losses arising from loan defaults -  typically this money comes from the bank's profit
  • (SARFAESI) Act - a recovery method that gives the bank the right to recover its dues by seizing the borrower's assets.
  • Asset Reconstruction Companies - a recovery method that allows banks to sell the defaulted loans at a discount to an ARC company, which then tries to recover as much as possible from the borrower. The loan is off the bank's books.
  • Insolvency and Bankruptcy Code (IBC) - another recovery mechanism in which banks could get the loan defaulters to opt for insolvency resolution in a time-bound manner to maximise value of the borrower's assets.
The Dirty Defaults
  • Today banks have a collective deposit of Rs.98 Tn, 62% of which are fixed deposits made by individual account holders.
  • Total corporate debt of top 288 companies with a minimum market capitalization of Rs.3200 crores ($500Mn) is Rs.18 Trillion ($281bn)
  • Total NPAs - Rs.8 Lac Crores (or 8 Trillion ~ $125bn)
  • Provisioning - RBI requires banks to set aside upto 50% of NPAs to compensate for the loss of interest income/principal

The top 12 defaulters are:
  1. Bhushan Steel (Rs 44,478 crore)
  2. Lanco Infra (Rs 44,365 crore)
  3. Essar Steel (Rs 37,284 crore),
  4. Bhushan Power (Rs 37248 crore)
  5. Alok Industries (Rs 22,075 crore)
  6. Amtek Auto (Rs 14,075 crore)
  7. Monnet Ispat (Rs 12,115 crore)
  8. Electrosteel Steels (Rs 10,274 crore)
  9. Era Infra (Rs 10,065 crore)
  10. Jaypee Infratech (Rs 9,635 crore)
  11. ABG Shipyard (Rs 6,953 crore) and
  12. Jyoti Structures (Rs 5,165 crore)
RBI measures
Under Dr.Rajan, RBI undertook the Asset Quality Review (AQR) in Dec'2015 to force banks to admit & expose the quantum of bad loans held by them. Since then several measures have been taken by the RBI & the government, some failed such as Mallya's extradition and IBC to recover the dues.

On Jun 13, 2017 RBI directed banks to refer the 12 large NPA cases for resolution under the IBC - these defaulters collectively owe Rs.2.5 Lac crores (~$39bn). In an another recent note, RBI said it plans to release the names of 35-40 companies as its second list of large defaulters who owe Rs.2 Lac crores (~ $31bn).

The companies featuring in the list are Videocon Industries, Videocon Telecom, JP Associates, Uttam Galva, Visa Steel, Monnet Power, Ruchi Soya, Orchid Chemical, IVRCL, Shakti Bhog, Nagarjuna Oil, Jai Balaji, Jayswal Neco, Soma Enterprises, Essar Projects, Unity Infra, Castex, East Coast Energy, SEL Manufacturing, Asian Colour Coated Ispat, Transstroy India, Ushdev International, Anrak Aluminium, BILT Graphic Paper Products Limited, Coastal Projects, GET Power Limited, Wind World (India) Limited.

The Big Write-offs

In the last 5 years, banks have written off Rs.2.46 Lac crores (from FY12-13 to FY16-17) - thats an average write-off of Rs.50k crores p.a, far higher than the Rs.30k crores that is spent on the healthcare of 1.3bn people annually.  It is estimated that another Rs.12 Tn currently classified as restructured loans may be reclassified as NPAs in future - that is a bomb waiting to blow!

Whose money is it to write-off?
While government is the biggest shareholder (90%) of the public sector banks which account for 70% of the entire deposits in the country & sits on 90% of NPAs, the deposits are made by the people, who not only receive poor interest rates on their savings and term deposits, but also get hefty fees imposed on everything from withdrawing their own money to closing of the account(s) - so, whose money is it for the banks to write off? If Rs.2.76 Lac crores was lost in spectrum scam, how would you account for this Rs.2.46 Lac crores (and more to be written-off)??

Comments

Popular posts from this blog

Fixed or Floating rate for my home loan?

Index

Covid Impact, Part I - To Personal Finance