Standing committee on finance also tells central bank to stop ‘knee-jerk’ reactions like discontinuing LoUs which it did after Nirav Modi ‘fraud’.
New Delhi: The Reserve Bank of India (RBI) should have differential treatments for “wilful defaulters” responsible for non-performing assets (NPAs) and those who defaulted due to adverse business climate or policy changes, a parliamentary committee has recommended.
The committee also advised the central bank to stop resorting to “knee-jerk” measures such as discontinuing the practice of issuing letter of undertaking (LoU), a bank guarantee that allows an importer to get short-term credit from another Indian bank’s overseas branch to pay suppliers abroad. The RBI discontinued the practice after it came to light that diamantaire Nirav Modi had misused LoUs to defraud the Punjab National Bank of thousands of crores.
The report, titled ‘Banking Sector in India — Issues, Challenges and the Way Forward including Non-Performing Assets/Stressed Assets in Banks/Financial Institutions’, was adopted at a meeting of the Parliamentary Standing Committee on Finance, headed by M. Veerappa Moily, here Monday.
The report also cautioned against creating an atmosphere of fear and insecurity among bankers, many of whom have been arrested and chargesheeted by investigative agencies in connection with their probe into bank frauds and NPAs.
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“With a view to restoring confidence and morale among bankers, the committee would like to emphasise that a climate of fear and uncertainty should not be created among bankers, which could translate into an unintended credit freeze, which may have the effect of slowing down the economy at a juncture when a high growth trajectory is the need of the hour. What is needed now is to improve governance standards and foster confidence-building in PSBs,” a committee member quoted the report as stating.
“The RBI as the banking regulator bears the responsibility to proactively fix the flaws/lapses, if any, in their oversight functions. However, while doing so, it needs to be kept in mind that difficulties arising out of sudden changes in economic/business/legal environment should be clearly distinguished from instance of intentional foul play or fraud.”
Another MP quoted the report as stating: “The RBI should consider separate treatment of NPAs due to wilful defaulters and those where defaults are because of extraneous reasons such as policy change in various sectors such as coal and power.”
As per the data submitted by the government to the committee, the quantum of funds involved in frauds in banks and other financial institutions during 2017-18 increased to Rs 32,048 crore against Rs 23,930 crore in the previous year, mainly due to banks such as the HDFC, ICICI and PNB.
The problem of leverage
The report dwelt at length on the issue of NPAs, pointing out that a group of 16 large and medium-size public sector banks (PSBs) wrote off over Rs 31,000 crore in the first quarter of 2018-19, a 31 per cent increase over a year ago, whereas the same set of banks saw a meagre 4.5 per cent growth in their loan book.
The committee noted that muted growth in assets, steep losses and erosion in capital have led to the build-up of high leverage (ratio of assets to capital) in the banking system, particularly for public sector banks. PNB, for instance, which reported a loss of about 12,200 crore in 2017-18, had a high leverage of 18.6 times. Except two banks — Indian Bank and Vijaya Bank — which posted profits in the fourth quarter of 2018, the remaining 19 PSBs posted record losses. The committee noted with concern that the loan write-offs at PSBs grew at a faster rate than the outstanding loans in the last quarter on account of lower credit.
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“It is necessary and prudent that these large legacy loans/NPAs are segregated for resolution and the balance sheet of banks sanitised therefrom, allowing them to move ahead with their regular business without getting bogged down with legacy issues,” the draft report stated, adding that the present crisis should not become an “alibi for privatisation” of PSBs.
The committee noted that the RBI’s revised framework on resolving stressed accounts resulted in a sharp rise in bad loans in 2017-18, “so much so that the bad loan provisioning has eaten into the earnings, as well as the capital of the PSBs”, further accentuating their problem of leverage.
The committee noted with concern that with limited scope of earnings, at least in the short-term, high leverage of PSBs could inhibit their lending capacity, which may adversely impact the economy.
RBI can’t escape responsibility
The committee report said that the RBI, as the regulator, could not escape the responsibility to sort out and fix the lapses in its oversight functions. For this, the erstwhile practice of separating promotional avenues in PSBs and SBI for the posts of executive director and chairman and managing director may be revived for greater harmony and accountability, added the report.
More incentives and a better remuneration package should also be given to the senior management of PSBs as there exists a wide gap in compensation package between them and the private sector counterparts, the committee recommended.
It noted that the central bank has been tightening the screws on the operations of 11 identified PSBs, including their lending and hiring activities, under the Prompt Corrective Action (PCA) framework. Many of the PSBs brought under the PCA last year are already on the brink and show how quickly their finances have deteriorated.
The RBI’s sudden decision in February to revoke all earlier corporate debt restructuring schemes has “hastened the slide”. The sole purpose of imposing PCA must have been to focus on recoveries, but this objective does not seem to have been largely achieved since the recoveries have either stayed stagnant or nominally grown, mainly because the parties with NPAs have “no motivation to pay back and prove their credibility”, as they do not look forward to any new loans from the bank.
“The RBI should provide a roadmap for these banks to come out of the PCA framework,” said the parliamentary committee.
In today’s climate of fear and finger pointing, bankers would rather be safe than sorry. The PSBs are terminally sick. How else does one describe a situation in which 19 – including SBI – of 21 PSBs have lost money. PCA status virtually immobilises a bank, especially granting fresh loans. There is no prospect of these banks raising fresh capital by rights or fresh issues. Recap funds are being burnt through losses. As a lifelong Congressman, Shri Veerappa Moily would not have the heart to recommend privatisation, reversing Mrs Gandhi’s fifty year old decision. Difficult to see what else would work. 2. The RBI’s hands are tied. The “ phone calls “ from Delhi to PSB leaders do not go through its switchboard. The appointments of Chairmen / MDs / Directors have their ineluctable logic as well. It was in fact Dr Rajan who got tough, forcing banks to recognise their NPAs, switch off the music. 3. Very difficult to place loans gone bad in two neat silos, one for poor business judgment, the other for wilful wrongdoing. Kingfisher Airlines, like most other cases, was a mix of both Scotch and soda. The overriding concern now should be to maximise recoveries, the sooner the better, using both the new bankruptcy structures and the good offices of the government, which still has life and death power over most businesses.