As Viral Acharya, who was a deputy governor of the RBI, put it in a 2016 interview, once you have the name of the country ‘or a state’s name in the name of the bank, the depositor knows … implicitly that the bank is … very safe’.
This belief, among other things, led to banks not cleaning up their bad loans. As of March 2015, the bad loans of PSBs stood at Rs 2,78,468 crore. This clearly did not reflect the total amount of actual bad loans in the system.
Meanwhile, Raghuram G. Rajan had taken over as the governor of the RBI in September 2013. It was only towards late 2014 that he started talking about the fact that banks were not recognizing bad loans and how the corporates had taken the banks for a ride.
Rajan had at his disposal a small army of RBI inspectors. He asked these inspectors to look very carefully at the books of PSBs. The idea was to figure out how big the bad money hole was. The findings revealed a distressing picture of the state of Indian banks.
Many big loans were officially in good shape, but in reality had gone bad, with very slim chances of being repaid. At the same time, many industrial projects for which debt had been taken and which officially were supposed to be in good shape, actually weren’t. The debt taken for these projects was never likely to be repaid. As Rajan admitted: ‘I got a sense that the numbers were hiding a darker problem.
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The banks had taken recourse to the various restructuring schemes that were on offer.
If the banks recognized the bad loans on time, they would have to make provisions for it, i.e., set aside money to meet these losses. Once they did that, their profit would come down.
Given this, and the fact that the ‘banker horizon [was] excessively short until end of the CEO’s term’, no one wanted to get into the messy bit of recognizing bad loans. Also, the restructured loans were exempted from provisioning. This also had incentivized restructuring, rather than recognizing bad loans as bad loans.
All this came to an end once the RBI launched the innocuously titled Asset Quality Review in July 2015. This involved RBI inspectors working with banks and going through their books and identified loans ‘that were of concern, as well as loans that had potential weaknesses’.
The dirt that came out of this exercise was huge. As Rajan put it: ‘It was at least two or three times what I expected.’
This can clearly be seen in the bad loans number of PSBs. As mentioned earlier, it was at Rs 2,78,468 crore as of March 2015. It jumped to Rs 8,95,601 crore as of March 2018. For banks as a whole, the bad loans had jumped from Rs 3,22,926 crore as of March 2015 to Rs 10,36,187 crore as of March 2018. The total amount of bad money in the system crossed Rs 10 lakh crore.
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The first step towards solving a problem is recognizing that it exists. By forcing an Asset Quality Review on PSBs, the RBI did precisely that. With the benefit of hindsight, it can clearly be said that this exercise should have been initiated at least three to four years earlier. But the thing is that until Rajan took over, the RBI did not seem to understand the gravity of the situation, or perhaps it simply ignored it.
There is a simple reason why recognizing a bad loan on time makes sense. It’s good accounting. Bad loans usually remain on the balance sheet of a bank for four years. After that, they are recognized as a loss asset and written-off, (We shall deal with this in detail in Chapter 17.)
A bad loan remains a substandard asset for a year and a doubtful asset for three years. As the number of years of a bad loan increases, the provisioning carried out against the bad loan keeps increasing as well. By the end of four years, a 100 per cent provisioning has been made against the bad loan. Hence, the bank has set aside enough money over a period of four years to write-off the bad loan.
Now take a situation where a bank has Rs 1,000 crore of outstanding loans from a corporate. The corporate stops paying interest on the loan and it is then categorized as a bad loan. In the first year, when the bad loan is a substandard asset, Rs 150 crore (or 15 per cent of the outstanding loan amount) will be provisioned against the loan. If it continues to remain unrecovered in the second year, it will become a doubtful asset. Between the start of the second year and the end of the fourth, another Rs 850 crore will be provisioned against the loan. At the end of the fourth year, the bank would have set aside Rs 1,000 crore to set off the losses against the loan.
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If at the end of the fourth year too the loan remains unpaid, then the bank has set aside enough money to face losses on the loan, categorize it as a loss asset and write it off
Now imagine a situation where a bank postpones the recognition of the same Rs 1,000 crore loan as a bad loan. One fine day, after the RBI crackdown, the bank will have to recognize Rs 1,000 crore as a loss asset and write-off 100 per cent of the loan. In this situation, the bank wouldn’t have set aside Rs 1,000 crore as a provision against this loan. This Rs 1,000-crore loss would have to be recognized against the most recent profit or, if the bank is not making any profit, against the bank’s capital. In the earlier case, the provisioning happened gradually over a period of time. Here it happens all at once and, hence, hurt the bank more.
Other than being bad accounting, it shows that the bank was not prepared, which isn’t good in a business as sensitive as banking. As Rajan put it: ‘We can postpone the day of reckoning with regulatory forbearance. But unless conditions in the industry improve suddenly and dramatically, the bank balance sheets present a distorted picture of health, and the eventual hole becomes bigger.’ This is how things played out in case of Indian PSBs.
Therefore, recognizing a bad loan as a bad loan on time is about doing the right thing and, in the process, preventing the problem from becoming bigger in the future.
This excerpt from Bad Money by Vivek Kaul has been published with permission from HarperCollins.
Crying foul after he was there ? Was in a good chair? Saw every book to see ? Had access to teams resources and power houses too ? But he was shackled tied and gagged is it ? What baloney. Whoever buts Mr Handsome shutters lies now needs better understanding of human psychology. This chap is intelligent no doubt but is as political and notorious as anyone who is not a Babu. He shifts blame to politicians because he is under scanner himself for circumventing facts, not publishing the truth and not taking the bull by the horns. His account of facts years later has zilch value. He can say what he wants to his grand kids not a nation full of alert citizens. Shirking responsibility continuously leads to sacking in any corporate office. That’s all that happened to him
Hand in gloves with sg,pg,rg, and clerk Manmohan to give bad loans
Ethics is only in the paper for corporates. Also efficiency is synonymous with corporate strategy for getting things done by unfair means. They uses their expertise in experience , knowledge and education in undesirable ways like manipulation of financial figures , favouritism in their daily routine. Corporate bosses are encouraging directly only those fellows and sincere workers are denied any prospects. Also in competitive field, the bankers are obliged to sanction loans accepting the results. While public sector banks are subjected to many audits, the same auditors who audit private sector banks are only certify as correct. As this is the case, it is always fashionable to compare financial figures of psbs and private sector banks. Can you see variety of customers and crowd in public sector banks premises. For eg only 1 to 2 percent accounts are opened by No frill accounts by the so called corporate compliance soldiers.
The sweeper in psbs will have more knowledge about npa casa deposits than a MBA qualified business executive. The overall growth and infrastructure development of India were provided by these public sector banks.
You need not praise but don’t demoraise them.
Instead of consolidating the different loan lending by single bank account, create small banks for specific lending, account it any loss or profit arise out of this business, which can not go out scanner, that can be monitored in better way.
From 2028 to 2020, the bad loans would have grown from 10 trillion to 20 trillion. Let the present governor take a honest review like Rajan did. But he wouldn’t do it for if he does he would also be shown the door.
No, No, No.
What did he do during UPA time?
Merry go round?
More than politicians it’s BEUREACRACY-Banker-Loan Taker Nexus. All three have immoral values due to Parochial selection process. Politician is easy to blamed who occupies chair for just short time but trio have perpetuity in job and so also interest.
Assess the ASETS of trio pre and post joining job, all will be clear. This opinion of RAGHUNATHGANJ is not a rocket science to be known at least for Indian Banks. Every one knows but helpless as executive it self is involved. Even if Court rules who to bell the cat. If people take it is called vigilantism or Unlawful.
Mr. Raghuram Rajan was associated with the union finance ministry long before he became RBI governor.The rot had set in when mr. Chidambaram was the FM in the Deve God’s cabinet. The bad loans were being evergreened on the basis of RBI circulars on restructuring of loans. Also no loans were being apprised on the actual figures of sales in a balance sheet of the companies. Banks were apprising on the basis of projected balance sheets without verifying the actual orders on hand and their genuineness. This was also on the basis of RBI circulars. The banks were also least bothered about the end use of funds and the verification of genuineness of the assets which they were duty bound to do.But the RBI looked the other way because they had all the reports of big frauds with them.
From the above it is clear that mr. Chidambaram had indirect control over RBI by making their henchmen like mr. Rajan and others and they created a system wherein the rot had set in from top to bottom.
My definitions of Bank:
1. For ordinary N sincere people: Bank is a place where you get money if you prove you don’t require any.
2. For rich N sincere people: Bank is a place where they get money, if they prove their project plan is practical.
3. For rich N dishonest: Bank is a place where they can get money if they prove they can make few bankers rich.
It is amusing to see most people commenting and blaming the politicians and officials.
But no body is giving any constructive solution.
This true gentleman was shown the door just because he was clean… very unfair…
You are Congress stooge or regional tamil biased man or organisation. Chitambaram was fully corrupt person & that’s the reason he was denied bail for more than 100 days depute being Practicing Supreme court lawyer. OK
Now we understand why he was not renewed but allowed to leave. Put the nation first.
He could not understand our indian ways, &link between politicians and bank.he was unable to give a solution for the error of UPA.