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Corporate defaults, not farm sector, bane of bad loans

Last Updated 24 May 2017, 18:37 IST

There is little doubt that Uttar Pradesh Chief Minister Yogi Adityanath and his party, the BJP, have scored a big political point by announcing a Rs 36,359 crore farm loan waiver at its first cabinet meeting. Close on the heels, the Madras High Court ruled on waiving of crop loans that cost the exchequer nearly Rs 2,000 crore more, by dint of which all farmers regardless of landholding size could avail of the windfall.

What is heartening is that the recent promulgation of the Banking Regulation (Amendment) Ordinance, 2017 is an admission that populism is a pattern that is akin to a steroid that works well in a short-term but is devastating in the long in view of mo­unting burden of bad loans in the economy.

In defence of farm loan waivers it has been persuasively argued that if corporate loans can be waived, by a parity of reasoning farm loans waivers are justified. Be that as it may, loan waivers may soon become a matter of policy, like the Madras High Court has done.

While asking the Tamil Nadu government to waive loans of all farmers, the court restrained cooperative societies and banks from recovering their dues. It has exhorted the Centre to share the state government's loan waiver burden. Following the instance of UP and Tamil Nadu, other agrarian states like Punjab and Maharashtra may accordingly choose to follow suit.

Reserve Bank of India Governor Urjit Patel has said loan waivers undermine an honest credit culture, impacts credit discipline and entail transfer of taxpayers' money. State Bank of India Chairperson Arundhati Bhattacharaya warned that loan waivers disrupt credit discipline of borrowers. What is of more concern that a major roadblock to banking sector is prevalence of Non-Performing Assets (NPA), a problem not taken seriously until it was mandated by the Narasimham and Verma committees.

As illustration of how farm loan NPAs harm the economy, the Rs 70,000 crore loan UPA-sponsored waiver in 2008 and those announced by the Andhra Pradesh and Telangana governments in 2014 have been widely commented upon. A former RBI deputy governor was quoted as suggesting that Rs 10 lakh crore is the real NPA, including Rs 4,00,000 crore write-offs since 2000.

But NPAs in the corporate sector are far higher than those in the priority or agriculture sector. The concept of priority sector doing the rounds since 1972 is very much part of the welfarist principles of the Indian Constitution. And going by the RBI grouping the priority sector into categories like agriculture, small scale industries, small businesses, state sponsored organisations for SC/ST, education loan, housing loan, consumption loan, micro credit, loans to software industry, food and agro processing sector, venture capital and export credit, farm loan waivers alone cannot be blamed for the erosion of an “honest credit culture”.

Reading between the lines among the reasons why bad loans are a big problem in India cited by former RBI governor Raghuram Rajan — besides overall economic slowdown — certain factors such as delays in statutory and other approvals for projects under implementation, laxity in credit risk appraisal and loan monitoring in banks, lack of appraising skills for projects that need specialised skills, wilful default, loan frauds and corruption need systemic redress.

Window dressing
An instance of lax credit risk appraisal relates to the Andhra Bank with more than 12% NPAs in power sector during 2015-2016 that did not factor in the lack of availability of coal for power projects in the next five years, which became an alibi for the borrowers for defaulting on their loans. In yet another instance of oversight, more than 200 hydro-electric projects were sanctioned in Uttarakhand without examining environmental factors.

By the time hydro projects were washed away in the 2013 flood, the horses had already bolted from the stable. That project appraisals need to be more diligent and should account for facts and uncertainties surrounding the project — in view of the fact that restructuring proposals often include optimistic industry scenario, unrealistic cash flow analysis, aggressive repayment schedule and date of completion of the project — is a wiser way to see through the “window dressed” proposals.

The rise of NPAs is ascribed to mismanaged lending practices of banks, a surge in lending and investment-related policy inertia in a low-growth, high-inflation environment. It is surprising that there is so much tolerance over corporate default that has contributed to the piling up NPAs. According to the previous Public Accounts Committee chief K V Thomas, out of the Rs 6.8 trillion of non-performing assets of public sector banks, a whopping 70% are those of big corporate houses, hardly 1% of which constitute loans to farmers.

Big corporate houses had taken loans for various infrastructure related works in sectors like civil aviation, energy and road construction, among others. Sectors such as textile, aviation, mining and infrastructure typically contribute to most of the NPAs, with loans doled out to them by public sector banks, provisioning around 80% of the credit to industries. Kingfisher was provided with a huge amount of loan by the SBI at a time when it was already embroiled in a financial crisis. As per the estimates by the SBI, education loans constitute 20% of its NPAs.

Therefore, in view of India's policy framework being a combination of socialistic and capitalistic features with a high bias towards public sector investment, in putting all the blame on farm-loan waivers, one can smell an obvious class-bias. According to the World Bank, India ranks 183rd among 196 countries in terms of loan recovery time and 149th in terms of loan recovery percentage.

India’s poor loan recovery process affects its ease of doing business rankings also. As per World Bank’s data, India ranks 136th in ease of resolving insolvencies and 130th in ease of doing business 2017. The bottomline is that without a strong and healthy banking system, India’ aspirational economy is bound to run aground.

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(Published 24 May 2017, 17:44 IST)

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