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Punjab National Bank (PNB), India’s second-biggest state-run lender, stunned the country’s financial sector when it announced a fraud worth Rs. 11,400 crore ($1.8 billion) and implicated designer jeweller Nirav Modi of the Gitan-jali Group, along with Ami Modi, Nishal Modi and Mehul Choksi.

PNB, which suspected the fraud, began digging into transaction history as branch records did not show any such facility granted to the firms and finally filed a complaint with the CBI on January 29, 2018. The PNB fraud-case did not only shock the entire economy but also served as an eye-opener for exposing the extent of corruption in the Indian banking sector. 

Corruption in the banking industry

Corruption is a persistent problem in India. According to the Corruption Perceptions Index prepared by Transparency International and published in 2017, the county is ranked 81 among 175 countries. 

There have been various instances when a bank chief’s tenure has been cut short by the government for alleged irregularities. There have been cases of arrests associated with the banking sector as well. Such rampant corruption in the banking sector impacts the overall economy. It leads to depletion in credentials which leads to lack of trust in the economy and defers the general public from saving or investing. When someone like Usha Ananthasubramanian (former CEO of PNB) is found to be involved in the PNB scam, it certainly crushes public trust in the banking system.

The increase of Non-Performing Asset (NPA) is forcing the Indian government to give bailout packages to banks and the money provided to banks as bail-out packages eventually comes from the public. The money that could have been used to ensure infrastructure and development (roads, bridges, irrigation and education) is used in these rescue packages to banks, reeling under the pressure of NPA.

MSMEs and NPAs

Several studies have shown that Micro Small and Medium Enterprises (MSMEs) are con-sidered to be high-risk borrowers due to their insufficient assets, high mortality rates, and low capitalisation and therefore account for NPA. At the same time, this sector is vital for India’s economic growth. According to latest data, the sector accounts for 8% of India’s GDP.

The sector is largely dependent on the banking system but the latter, under pressure from the escalating NPA accumulation, has become reluctant to provide credit to MSMEs. In the aftermath of the RBI’s stricter non-performing asset recognition norms, banks which were earlier reluctant to even acknowledge bad loans, have started recognizing these bad loans and have started provisioning for them. However, there has been little clarity on the recovery or resolution of the NPAs. To speed up the recovery, the government recently introduced the Insolvency and Bankruptcy Code (IBC), providing the RBI with sweeping powers to deal with the situation.

The banking sector is now moving from NPA recognition to NPA resolution. Methods taken for NPA resolutions include restructuring to bring in more capital, management change, and merger with other companies and asset sale. It also includes quality lending.

Quality Lending

Quality lending refers to giving loans to enterprises that will not result in bad debts. Quality of credit and credit risk is interrelated. Credit risk is inversely proportionate to quality of lending. An increase in quality of lending will decrease credit risk and vice versa. The Indian banking industry suffers from huge NPAs mainly due to poor quality of lending.

Scrutiny of proposals submitted by prospective borrowers for credit is the first step in the credit management process. For quality lending, bankers need to verify the authenticity of information provided by the applicant, after which the appraisal of loan as per the credit norms defined by the bank is carried out. Wrong appraisals may turn loans into NPAs whereas excess funding may lead to misappropriation of funds. The CIBIL report is one of the most important tools in this respect. It collects or enquires to get market information about the borrower. Collaterals for the proposed finance by the bank is significant to repay the loan by the borrower and to create an interest to involve in the proposed line of activity.  Collaterals are also useful to the bank to recover the dues in case of default or failure of the business or loan. However, to enhance quality lending to the MSMEs, the bank officials now check the specific organisation’s financial soundness and their credit ratings. Such details are scrutinized before the validation of the loan.

Such stringencies often lead to failure to obtain credit for the MSME sector. The Bank of India (BOI) has recently focused on giving a boost to capital light credit growth in retail and MSME sectors. The focus is on improving bank’s bottom line with sustained quality credit growth in retail and MSME sector and maximising resolution of stressed assets. The unique initiative of ‘Ghar Ghar Dastak’ is continuing to bring in new customers to the bank. BOI has also initiated various measures for resolution of stressed assets through available recovery measures like OTS, SARFAESI, and NCLT action.

Dinabandhu Mohapatra, Managing Director and CEO, Bank of India, in a recent press meet stated, “`1993 crore would be realised by BOI from the first successful NCLT resolution concerning Tata Steel and Bhushan Steel.” He also stressed the important role that is being played by area managers and ‘Nari Morcha’, a group of women employees of the bank who go door to door for NPA recovery.