‘We’re cleaning up the banks’ – FinMin gives the numbers

IDBI Bank had one of the highest shares of bad loans

Finance ministry on Thursday gave detailed numbers to detail the efforts that the Narendra Modi government has been making to overcome the problems created by corruption and bad loans in India’s public sector banks.

Finance Minister Nirmala Seetharaman pointed out that a review in 2015 found that a huge chunk of loans issued in previous years were not being paid back. However, these loans were being hidden from public and regulatory scrutiny by bank managements, who classified them as ‘restructured loans’ instead of ‘bad loans’.

Restructured loans are the loans whose terms — such as the payment schedule — are drastically altered to make it easier for the loanee to pay it back.

When big corporate houses used to default on loans, managers would often try to hide the fact by moving the loan into a ‘restructured category’, even though it would be clear that the company could not or would not pay it back. This is done partly because defaults could invite unwelcome questions about the officials who sanctioned the loans.

It is estimated that about one-fifth of the Rs 69 lakh crore of loans advanced by scheduled banks in India had turned bad by 2015.

“Asset Quality Review (AQR) initiated in 2015 for clean and fully provisioned bank balance-sheets revealed high incidence of NPAs [bad loans],” Seetharaman said.

“As a result of AQR and subsequent transparent recognition by banks, stressed accounts were reclassified as NPAs and expected losses on stressed loans, not provided for earlier under flexibility given to restructured loans, were provided for. Further, all such schemes for restructuring stressed loans were withdrawn.”

When this was done, she pointed out, bad loans jumped from around Rs 3 lakh cr declared before the exercise to a peak of Rs 10.36 lakh cr by March 2018.

She said various reasons were identified for the creation of so much bad loans, including corrupt practices by bank employees.

“As per RBI inputs, the primary reasons for the spurt in stressed assets have been observed to be, inter-alia, aggressive lending practices, wilful default/loan frauds/corruption in some cases, and economic slowdown,” she said.

The Narendra Modi government, the ministry said, has put in place several measures to ensure that such incidents do not recur.

These include directions to banks to also look at all NPA accounts above Rs. 50 crore as possible fraud and the enactment of Fugitive Economic Offenders Act 2018, which empowers heads of Public Sector Banks (PSBs) to request for issue of Look Out Circular.

The government has also established a National Financial Reporting Authority and has brought about linkages between international, SWIFT transactions and the bank’s own banking software.

Seetharaman said that the government has also directed public sector banks to obtain certified copies of passport of promoters and directors of companies availing of loans exceeding Rs. 50 crore.

Because this, she said, the incidence of ‘frauds’ on scheduled banks has come down in the last three years.

The total amount lost by banks to frauds has declined from Rs. 25,884 crore in the financial year 2016-17 to Rs. 9,866 crore in FY18 and further to Rs. 6,735 crore in the year ended March 2019.

The government has also directed the banks to adopt an aggressive policy of recovering money from those who are refusing to pay up.

Out of the Rs 10.36m lakh crore of bad loans reported in March 2018, Indian commercial banks have recovered Rs 4.01 lakh crore over the last four financial years, Seetharam said.

In the year ended March alone, they recovered Rs 1.57 lakh crore, she said.

As a result of such aggressive actions, the total gross non-performing assets, or bad loans, with scheduled banks in India has fallen by Rs 1.03 lakh crore in the last financial year to Rs 9.34 lakh cr as of March 31, she added.

However, despite this, said the minister, Rs 2.46 lakh of taxpayer’s money has had to be given to the banks in the last four years to compensate them for the money that their borrowers are unable, or unwilling, to pay back.

The banks have also raised Rs 66,000 cr from the market during the period.