By Shri Devidas Tuljapurkar, General Secretary, Maharashtra State Bank Employees Federation and joint secretary of the All India Bank Employees Association and a former director of the Bank of Maharashtra.
(The article appeared in The Wire and is reproduced with the permission of the author)
The minister of finance and corporate affairs Nirmala Sitaraman has time and again stated that ‘write off’ does not mean relief to the borrower. The rich corporate borrowers, who are usually the beneficiaries of such write-offs by banks, remain liable for repayment and the process of recovery continues, the minister has asserted. Banks continue to pursue recovery actions initiated for written-off accounts through various mechanisms.
When a borrower fails to pay back a loan, it is termed as a non-performing asset (NPA) under conditions laid down by the Reserve Bank of India. But banks are required to compensate for the loans classified as NPAs, an exercise known as ‘provisioning’ in banking terms. This provision is made by setting aside some amount from the bank’s profits on an annual basis as stipulated by the RBI. Over a period with a provision of about 100%, such NPAs are then removed from the asset books of banks and are known as write-offs. Bank professionals or chartered accountants too argue that a write-off is purely a balance sheet exercise, to reduce a bank’s tax liability. They argue that the accounts that are earmarked for write-off are normally 100% provided. Thus, while writing off the accounts, banks are not put to loss at least in the balance sheet. But merely compensating for NPAs and bad loans from profits made elsewhere does not take away from the fact that write-offs constitute a huge drain on public money entrusted with banks. In addition, they constitute a bonanza for the big defaulters.
A bonanza for corporate defaulters, a burden on the public
Banks have written off Rs 14.56 lakh crore between 2014-15 and 2022-23. The share of large industries and services in the written-off amount is Rs 7,40,968 crore or 48.36%. The amount recovered during the period is a mere Rs 2.05 lakh crore or. 14.07% of the write-offs.
The simple question arising out of these figures is, who pays for the remaining amount of 86% of unrecovered write-offs? It is the respective banks that ultimately bear the burden and this is precisely the reason why banks had to book the losses amounting to Rs 2,07,329 crore successively for five years from 2015-16 to 2019-20.
Even though borrowers continue to be liable for repayment, in practice banks are compelled to forgo any hope of recovery. Thus, in practice, a write-off becomes not only a waiver but a sort of debt relief to the borrowers in which predominantly corporates have a major share. This is shown by how NPAs have been brought down over the last few years.
The amount of provision on account of non-performing assets for the period 2010 to 2015 was Rs 2,43,935 crore, which rose to a whopping Rs 21,48,906 crore for the period 2017 to 2022. This shows that the write-off exercise not only entailed a relief to big borrowers but also involved the transfer of a share of profits towards provisioning for bad loans.
The continued losses booked by banks from 2015-16 to 2019-20 led to an erosion of capital. Thus, from 2016-17 to 2020-21, the government had to infuse more than Rs 3 lakh crore in public sector banks in order to maintain mandated minimum capital. That amount could have been used on education, health and social welfare. The story doesn’t end here.
The present political dispensation at the Centre claims that they have succeeded in tackling the legacy issue of NPAs. The government cites the data that gross NPAs, which were to the tune of Rs 10.21 lakh crore in 2018, have gone down to Rs. 5.55 lakh crore as of 2023. But this reduction has been achieved owing to the write-off of a whopping Rs 10.57 lakh crore.
Mergers of public sector banks benefited corporates
This was the period during which the government resorted to ‘consolidation’ of public sector banks (PSBs). Thus the number of public sector banks has gone down from 27 to 12. As a sequel effect, large-scale closure of the branches of merged entities has taken place, putting customers, especially senior citizens and the poor, in their command areas through unnecessary inconvenience. This consolidation was neither demanded by the customers nor by the shareholders, nor by the employees. As was being argued by the government and some academicians, this was proposed to help reduce administrative costs, increase risk appetite, provide better capitalisation etc. But the same now has proved to be an alibi. Rather, bank consolidation and the formation of bigger entities help corporate borrowers raise finances from a single financial institution. Banks have to adhere to RBI’s stipulated group-specific exposure limit, which refers to the maximum loan as a percentage of its capital base that a bank can offer to a specific business client. Since mergers increase the capital base of the new entity, they allow corporate lenders to seek loans from a lesser number of banks rather than approach many financial institutions to raise money.
Consolidation of PSBs has proved to be a boon for private banks. During the period 2017 to 2022, the number of branches of PSBs has gone down from 91,445 to 84,256 while that of private sector banks has gone up from 24,661 to 37,872. This excludes the 12 small finance banks and six payment banks which have added thousands of branches during 2016-17 to 2020-21. This had an obvious effect on business. As against 2019, in 2023 business of public sector banks has grown by 38.35% while in the case of private sector banks, this growth is by 67.30%, as per data collated by the author. This data speaks for itself. The space which public sector banks have vacated consequent upon consolidation has been occupied by private sector banks and thus it shows that even though banks have not been privatised, banking business is being privatised – which is the main agenda of Indian corporates as also of international finance capital.
The non-solutions of the IBC regime
The government has been claiming that the Insolvency and Bankruptcy Code (IBC), 2016 has proved to be a game changer. Since its establishment, only 14% of NPA accounts referred to the IBC were resolved through resolution plans. This led to a recovery of 31% of the amount which was due but only with the sacrifice of 69%. The IBC has clearly not proved to be the promised panacea for the NPAs.
Nor has the IBC had a deterrent effect on defaulters. According to data collated by Trans union Cibil, a credit information company, there was a notable increase in the number of wilful defaulter accounts at all ‘credit institutions’ between March 2018 and March 2022. During this period, the count of such accounts rose from 20,066 to 31,026, for loan defaults of Rs 1 crore and above. This signifies a 64.67% uptick in the number of accounts.
Individuals involved in illicit activities within the corporate sector, particularly those seeking to defraud financial institutions, appear to be displaying increased enthusiasm for their wrongful actions. Their growing confidence likely arises from the belief that they can escape legal repercussions. A perception that seems to find support in the contentious circular issued by the RBI on June 8, 2023, that spoke of a framework for compromise settlements and write-offs for wilful defaulters and fraudsters. The RBI was forced to issue a clarification explaining that it had a stand on settlements with wilful defaulters and fraudsters for 15 years!
The lenient approach adopted by both the government and the RBI carries significant implications for evaluating the effectiveness of the IBC.
The past decade stands witness to hollow claims by the government of having tackled the menace of non-performing assets. Rather, the government has bailed out the corporations through rising haircuts, remission and write-offs.