It is fully within the rights of general taxpayers to ask questions on how the tax-money government collects from them is deployed.
Given that banks are going broke with ballooning bad loans and that majority of them (to be specific 70 per cent of the industry by assets) are government banks, which are capitalized every year by the government using taxpayers’ money, there is no surprise why the Supreme Court asked the Reserve Bank of India (RBI) on Tuesday to hand over the names of large defaulters to the apex court. The court has asked the question, which millions of taxpayers would want to ask. Clearly the bank recapitalization has become a major burden on the public exchequer.
Consider this: In the last eight years, the government has infused Rs 90,000 crore in India’s 27 public sector banks. This fiscal year alone, the government has so far infused Rs 20,000 crore out of the promised Rs25,000 crore. This is part of the Rs 70,000 crore package the government has promised to the government banks over the next few years to fill their funding gap for credit expansion, mandatory reserve requirements under Basel-III requirements and the bad loan provisioning. Now, is this money is used efficiently by banks? The answer lies in the balance sheets of these lenders.
As visible in the form of bad loan mountains being disclosed by the banks nudged by the RBI, state-run banks have failed to efficiently use this capital. Most of this money has gone bad (means loan money hasn’t returned to lenders) on account of poor judgment on the creditworthiness of the corporate borrowers, pressure to fund social sector (remember the 2008 mammoth debt waiver scheme) and innumerable government schemes.
By virtue of their public sector character, bank management’s have hardly been taken to task on inefficiency in operations. Thus, most chairmen and EDs of state-run banks contributed to the mess and happily passed on the buck to their successors for years. Bad loans were covered up in the form of restructured loans and technical adjustments as every outgoing chairman wanted to show a good book and ensure a post-retirement berth. Even now, the only reason why banks are reporting massive amount of bad loans in the October-December quarter is the March, 2017 deadline given by RBI to disclose all bad assets on their book or ‘clean-up’ their balance sheets. Else, state-run banks would have happily continued to bundle up their bad assets unto a point the system blows up at some point.
But, the point here is at least from now on, as Firstpost argued in this article, the government must count every penny it gives to state-run banks and how the money is used, instead of keep gambling with taxpayers money every year. It should take strong punitive action against large corporate defaulters (which constitute 65 percent -70 percent of the total Rs 4.4 lakh crore bad loans in the banking system).
The government and the RBI should also make sure credit appraisal mechanism is foolproof and NPAs emerge only in cases of genuine stress (where the only hope is better economic conditions) not by lending to politically-connected crony promoters through middlemen. Given that reasons for the corporate loan defaults, as appears now, are not mainly the general economic slowdown but the mismanagement and inefficiency of banks, willful defaults and reckless lending, bank managements are answerable for the current mess in the banking system.
In this context, the Supreme Court has asked the right question when it demanded the list of defaulters (above Rs 500 crore in value) from RBI. Already, RBI has the details of defaulters with various banks, which is circulated among banks and credit bureaus. This, however, is not shared with the public since this information is sensitive to commercial confidentiality. But, given that things have gone to a real mess now and the banking industry is nearly facing a bad-loan crisis, it is highly critical the wrongdoers are taken to task by judiciary, regulators and the government to recover the money.
Once it gets hold of the list of large defaulters, the apex court can ask the government and the banking sector to initiate legal actions against wilful defaulters, who wouldn’t pay back to banks, despite having the wherewithal to do so and even make a mockery of the system by publicly flaunting their wealth. After all, crony promoters have used the same judicial platforms to their advantage for long for not repaying the money they owe to the lenders.