The RBI's focus on NPA's in public sector banks has set the cat among the pigeons. Reports based on Credit Suisse research which is spreading through social media, point to a massive mess. The Government of India recently infused Rs 700 billion into public sector banks but apparently more is needed. King Fisher and its promoter continue to be poster boys of this new focus on people and companies who do no repay their loans but continue with their original lifestyle leaving Government backed banks in a soup. The same report says that while RBI pegs NPA's at 11% the actual NPA is 17% because banks many banks cover or hide NPA's by window dressing.
SBI's National banking group Managing Director, R Kumar came up with a spirited but lame defense of the mounting bad debts. Apparently when taking credit decisions, banks make some presumptions, he harped on the economic environment that effects a country. Since he was issuing his statement in Goa he tried to further defend his position by using the mining ban. How was the bank to know that illegal mining was going on, and did the bank do any wrong by financing all the trucks and barges, is it not their job to to promote economic activity?
Yes it is the banks job to promote economic activity and ask any MSME applicant, they have experienced the throughness with which the banks do their job, they need to see all the NOC's associated with the business to ensure it is legal, the projections to ensure paying capacity, the feasibility of product in market etc, today for eg: a black and white TV manufacturer will never get funded or for that matter a matka bookie.
His defense actually opens a can of worms, the banks did not do their homework or were forced to fund despite knowing the perils, because of political patronage. Why would the bank fund all applicants for barges and trucks. The applicants would be competing for the same ore to be transported, and therefore rates would get depressed. Was there ore available to be transported for all the trucks for the entire tenure of the loans? Did they not, do research on the mining sector. Was this level of mining sustainable and was there business for every barge or truck in the State? In short the banks goofed up big time.
He asks another question, can the banks only be held solely responsible, no the borrower too is responsible. Just because the bank lent the money does not mean it should not have recourse to recovery because the business has gone belly up. Unfortunately, we have got used to the words “OTS” one time settlement. A business borrows money and after a while of not paying the dues and interest the dues mount and the lender with tacit support of the Government agrees to close the account if the errant lender pays a small part of the original amount borrowed. EDC, the State run finance Company has closed quite a few NPA accounts using the OTS route. Why were the collateral security offered at the time of taking the loan not encashed is anybody's guess. Ofcourse there are a few cases where the original secured assets and collateral security have been disposed to recover the dues, unlucky borrowers one might add.
Vijay Mallya continues his flamboyant lifestyle despite owing upwards of 7000 crores. His, is a limited liability company and so he has nothing to worry about. His money and the companies money are separate. If the banks have no recourse to his personal assets it is their problem. However, if one looks at balance sheet of the borrowing company, it is clear that diversion is visible. Money lent to one Company by the bank is in turn lent to another closely held company. This is clearly prohibited by the standard lending clauses. Infact most banks want a borrower to take prior permission even to pay dividend. If that is the case then those borrowers who violate the lending clauses should be taken to task and not allowed to laughing all the way from the bank. If for example a business goes bust due to market forces eg B& W TV's, then it is ok if you invoke the limited liability clause and recover only what is possible after selling the mortaged assets. In cases of diversion which amounts to fraud, criminal action should be initiated to as to recover all the money from the promoters personal assets.
In Goa, mining effected borrowers continue their normal lifestyles while asking for a waiver or OTS, when the going was good did they offer to share their profits with the State or lenders, then is it fair that in a crunch situation they want the State to pay their dues from tax payers money. If they feel that their demand is legitimate then every business that fails due to adverse market conditions must be entitled to the same benefit. We keep asking the Government to stay away from business but when a business tanks, we want the Government (read tax payers) to bail us out. For bank NPA's to reduce we must stop robbing Peter to pay Paul.
Blaise Costabir is an alumnus of the Asian Institute of Management and a first generation entrepreneur
