It is often the case in India that big entrepreneurs do business with the help of public money borrowed from banks and other financial institutions. They expand their business, borrow again and use it for some other businesses. Their names feature in the list of top billionaires but when it comes to repaying their debt, not all of them are equally forthcoming.
The names of these billionaire defaulters are known to the government but are seldom disclosed. But such large-scale Non Performing Assets (NPAs) adversely impact the banks. The money in the treasury of the banks belongs to the general public and the banks lend it to the entrepreneurs. If this money doesn’t come back to the banks, then the small depositors will be the worst affected in the long run. Infrastructural development will falter, agricultural loans will wane, and small and medium entrepreneurs will not get money for initiating businesses.
Are the banks really sick?
In 2016-17, the public sector banks had Rs. 81 lakh crore as deposits, Rs.56 lakh crore as loans and investment was almost Rs.26 lakh crore. The amount of deposit collection proves that the general public in the country still have their faith firmly on the public sector banks. The single most important reason behind weakening of the public sector banks is the non-payment of large loans. According to the government, the non-paid debt amount is around nine lakh crore. However, the bank unions claim that the amount is somewhere around Rs.17- Rs.18 lakh crore. Different laws are being passed but nothing seems to arrest this trend of non-repayment of debt. The banks are becoming weak and big corporates are growing at their expenses. The government must act decisively to ensure repayment of corporate debt and not promote absurdities like the Financial Resolution and Deposit Insurance (FRDI) bill.
There are 21 nationalised banks, 56 rural banks, 31 state cooperative banks, 370 central cooperative banks, 1606 urban cooperative banks and 93000 primary agri loan associations in India. This powerful system has worked seamlessly for a long time. On the other hand, 559 private banks have closed their doors between 1947 and 1951. Nationalised banks have taken over 25 private banks after 1969. In the year 1969, total deposit and loan amount of the banks were Rs.9000 crore which has risen to Rs.140 lakh crore.
In 2004, banks had Rs.48000 crore NPA. It became Rs.194000 crore in 2012 and in 2016-17 it became Rs.711000 crore. In September 2017, it became Rs.900000 crore. This amount is due from only 500 accounts. According to the statistics by the finance department, 12 companies have been identified whom owe around Rs.260000 crore to banks. In 2015, the nationalised banks accounted a total profit of Rs.138700 crore and net profit ofRs.37000 crore. In 2016, total profit was Rs.137300 crore and after provisioning there was a net loss of Rs.18670 crore. In 2017, the banks had a profit of Rs.159000 crore but after provisioning again a net loss of Rs.11000 crore. So the question is, if there is total profit then why is there a net loss? This may be attributed to the fact that banks have to make provisions in their balance sheets for those who don’t repay their loans.
Those loans, which will never be repaid or those companies who will not have to repay the loans have been deleted from the balance sheets of the banks with the help of ‘write off’ provision. The amounts are Rs.146900 for 2004-14,Rs.49000 crore in 2015, Rs.57400 crore in 2016 and Rs.81500 crore in 2017. In totality, the banks had to ‘write off’ around Rs.188000 crore in the past three years, which has significantly weakened them.
FRDI bill – 2017
The bill can be seen as a continuation of the government apathy towards the public sector banks. These banks have been forced to provide loans to big entrepreneurs, even at the risk of incurring NPA. Shares of nationalised banks have been sold in the share market. On the other hand, focus on agricultural loan and other priority sector loans have decreased. The new bill- FRDI- was approved by the central finance ministry in June 2017 and has been placed before the Parliament. According to many commentators, this bill will further weaken the banking sector. Certain problematic features in the bill are as follows -
1. It will be able to close or merge any bank, insurance corporation, rural banks and cooperative banks can be merged or closed on conditions of bankruptcy.
2. It will be able to not repay the depositors and instead can increase the period of term deposits or exchange liquid cash with share equity of those specific institutions.
3. Decisions of this committee (in charge of arbitration) cannot be challenged by any government organisation or the court.
The government seems to be in no mood to provide the banks with money from the treasury. It has recently lent money to 11 banks with certain stringent conditions. Now they have turned towards the deposit amount of the general public. They will give money to the weak banks from the deposits by a process better known as ‘bail-in’ but no action will be taken against big corporates who have large unattended debts. The Reserve Bank of India under its Urjit Patel feels that merging and thereby reducing the number of banks will lessen the amount of NPA. Until there is a paradigm shift in the policy perspective in the banking sector, the ensuing crisis cannot be wished away.