Banks have always been in the news more often than not for all the wrong reasons. And the jury has always been out on whether the problem of Non-performing Assets (NPA) is predominantly of the borrower-inflicted or fence-eating-the-crop variety though the preponderance of view is it is the latter. The Narendra Modi government to its credit has not brushed the problem entirely under the carpet but, in fact, has read the riot act to the perpetrators by enacting the Fugitive economic offences law that empowers authorities to seize and impound assets of borrowers slipping out of the country. Vijay Mallya who has the dubious distinction of being the first to be declared ‘fugitive’ finds his London home quite disquieting with the threat of being extradited looming large.
The ongoing news of
ABG Shipyard owing to as many as 28 banks a massive Rs 22800 crore, with the CBI suspecting massive diversion of funds by its directors has come at a time when the government thought that the NPA menace was under control at 8.5 percent of the total outstanding from the earlier 14 percent. The truth is we can never go into a self-congratulatory mode or become complacent because Indian banks barring a few are virtually sitting on an unknown quantity of powder keg in their loan portfolios. Periodic recapitalisation of PSBs after cleaning up their balance sheets (euphemism for write offs) with taxpayers’ money amounts to throwing good money after bad and only serves to delude the public into believing that everything is hunky-dory. Bad bank is a bad idea, period. It is another variant of cleaning up the balance sheet this time round by banishing the offending bad loans into the arms of a so-called specialist in recovery at a huge discount. The bottom-line of course is loss and waiting in eternity for payments on the back of recoveries by the bad bank to trickle in. The Insolvency and Bankruptcy Code (IBC) another initiative of the Narendra Modi government when Arun Jaitley was at the helm of the Finance Ministry hasn’t worked beyond dethroning the defaulters from the saddle with haircuts often in the range of 90 percent. A company taking over the reins of the one in dire straits extracts its pound of flesh.
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Time, we embraced asset-based financing. It is akin to what a kind-hearted person does to a poor boy for his education. He wisely buys books for the boy and pays his tuition fees instead of donating to the family which for all one knows may fritter away the money in better living and whose patriarch may use the money for boozing. It is also of a piece with the alms in kind mainly food given by the kind-hearted to beggars. Likewise, a bank should buy the machinery and other paraphernalia needed by a company and lease them to its client. Alternatively, loans can be sanctioned with an express condition that it has to be used only for buying assets already identified by the three parties---bank, supplier and the borrower. Handing over cash is dangerous as it entices one to divert to feather his own nest. Periodic utilization report sought from the borrowers is akin to closing the stable after the horses have bolted!
Gold loans have almost nil NPAs thanks to pledge of gold with the lender who in addition keeps a safe margin of about 28 percent as per the current RBI norms. Home loans too produce very little NPA thanks to the threat of the lender rendering the defaulter roofless. It is the business loan that are sanctioned on the back of hypothecation (with possession of the security continuing in the hands of the borrower) that leaves the lender vulnerable. Indeed, hypothecation is the weakest security for the lender. It is in substitution of the hypothecation model that banks must embrace asset-based financing.
For the working capital needs, big borrowers must be made to issue bonds. Wily borrowers who thumb their noses at banks particularly PSBs, dare not take chances with the market which ruthlessly reduces defaulting bonds to the junk category, the most effective form of naming and shaming. Unless we usher in roots and branches reform in lending, it would be business as usual with banks helpless and borrowers laughing up their sleeves.
— S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own.
Read his other columns here First Published: Feb 13, 2022 5:52 PM IST
