RBI, banks shielding big defaulters unacceptable

IVRCL is the company responsible for the disastrous collapse of the flyover that took many lives in Kolkata. And the owners who will have to take the blame and bear the resultant losses are the public sector banks (PSBs).

Less than 6 months ago, the banks took over 51% stake in this debt-ridden company to square off its dues. The label given to this suicidal decision by the Reserve Bank of India (RBI) is Strategic Debt Restructuring (SDR). The RBI claims it permits such deals but does not monitor them.

Banks are in the business of getting deposits from many customers and then lending it to various borrowers after assessing their projects. If a borrower fails to repay the money, the bank’s primary concern is to ensure its profitability and safeguard the interests of its depositors. Until 1994, this was the prevailing view among the RBI and the banks.

The RBI had, by its circular DBOD No.BC/CIS/47/20.16.002/94 dated April 23, 1994, directed all banks to send a report on their defaulters, which it would share with all financial institutions, with the following objectives:

1) To alert banks and financial institutions (FIs) and to put them on guard against borrowers who have defaulted in their dues to lending institutions.

2) To make public the names of the borrowers who have defaulted and against whom suits have been filed by banks/FIs.

After this, a paradigm change occurred. In case of large defaults, it was well known that there were complex bureaucratic and political considerations compounded by corruption.

Slowly, the case was made out that when large borrowers fail to repay, the banks must make a business decision about the revival and sustainability of the business. While governments or its institutions are not really suited to take business decisions, this flawed idea was propagated that when large businesses did badly and defaulted, the banks must rush to their rescue.

From past experience, the banks and RBI knew that once a business becomes a Non Performing Asset (NPA), the chances of recovery were rather slim and hence the defaulting amounts had to be written off in 3 years. It is interesting to note that from 1993 to 2009, the NPAs fluctuated between Rs 39,000 crore to Rs 56,000 crore.

In August, 2001, a Corporate Debt Restructuring (CDR) cell was set up. This was a tool to label NPAs as a CDR, giving more time for repayment and often reducing interest. This would also make the financials of PSBs more respectable.

Apart from Rs 3.6 lakh crore worth of NPA, the total debt labelled as CDR instead of NPA is about Rs 4 lakh crore, of which only Rs 0.6 lakh crore has been recovered so far. Much of the defaults labelled as CDR are likely to become an NPA.

Alarmed at this rise of NPAs, the RBI decided to bury its face in the sand like an ostrich in 2014. It stopped asking banks to report their NPAs to it.

It was learnt in 2015, that despite being labelled as CDR, NPAs had ballooned to over Rs 3.5 lakh crore. A new strategy was developed with a new label this time – Strategic Debt Restructuring (SDR). To avoid calling a default as an NPA, banks had a choice to call it CDR or SDR now.

In SDR, banks are expected to take the shares of the defaulting corporate and try and run the business profitably. The total amount in SDR is unknown, but there are rumours that it is already over Rs 1 lakh crore. Most of these are with the PSBs.

Thus, Rs 3.6 lakh crore of acknowledged NPAs with Rs 3.4 lakh crore in CDR and over Rs 1 lakh crore in SDR will mean over 8 lakh crores of likely bad debt. Over 90% of this is of the public sector banks.

The market cap of all nationalised banks is about Rs 2.7 lakh crore. When an NPA is labeled as SDR, equity may be taken up – as in the case of IVRCL – and this will no longer be considered debt.

Landmark decision

The Supreme Court, in a landmark decision on December 16, 2015, ordered the RBI to release information about its activities and the banks it is expected to regulate. The apex court had, in a well-reasoned ruling, upheld 11 orders of the CIC (10 of these were given by the writer) asking the following information to be made public:

1. Investigations and audit reports of banks by RBI
2. Warnings or advisory issued to banks
3. Minutes of meetings of governing board and directors
4. Top defaulters
5. Grading of banks

It appeared that RBI Governor Raghuram Rajan was inspired by this and gave the following new year message to his officers: “It has often been said that India is a weak state. Not only are we accused of not having the administrative capacity of ferreting out wrongdoing, we (also) do not punish the wrongdoer – unless he is small and weak.”

However, in less than 3 months, the RBI appears to have reversed its stand and is now denying this information to Right To Information applicants, including this writer. Perhaps, the RBI governor has been subjected to certain pressures.

Citizens and the media must persuade the RBI to honour the Supreme Court’s order and understand that opacity will lead to these banks going into a zone of disaster which will affect the entire nation.

The Kingfisher default is only about 1% of the total debts and we need to wake up and heed the SC’s judgment for RBI to be transparent. We have no idea how bad the situation is and the RBI, which is charged with this responsibility, is acting like Gandhi’s 3 monkeys. This is not healthy for the nation. Illusions and delusions are alright in a magic show, but not for the nation.

(The writer is former Central Information Commissioner)