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.
C&AG should be handed the responsibility of Audit of the entire banking system.
Prof.Raguram Rajan is an expert in d indian banking system.He should given a coveted post to clean d present mess in d system.Asset Quality Review should be strict n d concered CAs should be punished if they fail to give real picture of d bank.
He is less of Economist, more of politician of liberals. A wolf in garb of economist.
Considering his stature, he should keep away from cheap comments and advices.
The political party he is subscribing has lost power with no scope to get its dynoma charged in next decade, without taking crutches of other regional parties.
Thank you Sir,
For your impeccable answer.
Thanks.
I have heard of eununchs in the roman empire given the post of coin management….
There is no doubt about his knowledge. But his contribution was not the same. He was got every free dom starting from cleaning of books to building up forex reserve was made during NDA 1. But he never given credit to the FM. He has taken all the credit. But when comes to responsiblity he told the power was centralized. It is the hypocrisy.
There is a very simple fix for this problem
1. Put all depressed assets of PSBs, put them under a ‘bad bank’ owned by government. Estimated assets /liability of 10 lac crore – a lot of it could be sold to debt reconstruction companies.
2. Privatise the PSBs, no exception.
3. To provide free banking to all, the government can pay Rs 1000 fees on behalf of every citizen to a primary bank that they choose to bank with. If banks don’t provide good service, people will change banks and the government fees will go to the thier new bank.
4. Do away with priority sector lending requirements etc. If loans are to be provided for social enterprises, let government provide guarantees or provide interest subsidies or other open market methods.
5. Make a national infrastructure bank, this will be used specifically to finance infrastructure etc. Along the lines of what they have in Germany. Infrastructure should be financed by bonds, not blind pending by retail banks.
Which ever party rules finance minister shoul be Mr. Rajan because an honest and able man who can give direction to India in which direction it should move.but problem in Indian political leaders that they think I know everything and they need not an honest and sincere person.country needs another reform after 2000 and in present circumstances he is the best man to lead.
Previous Union Government never faced problems with courage and came out with bold decisions as they wanted to continue in throne. For any business to thrive, facts about threat to the business should be accepted and addressed. For example, state owned power corporation was not allowed to increase the tariff to reduce the gap between cost of generation and revenue for many years by one political party during their tenure in Tamilnadu resulting in huge debt accumulation by the power corpn. Failure in Loan recovery is faced even by a small money lender. Data are available from root level in banks. If an asset is declared as NPA when genuine sickness is seen and actions initiated it would have saved a lot. Decisions on actions were postponed/not taken within the time frame allowing things to worsen during Congress regime.
It is the bank to officials colluding with business tycoons allocating big loans against concocted collateral provided for getting the loan approved and receiving kickbacks in return. Normally banks are facing NPA in big loans more rather than small and medium size. I strongly feel that nationalised banks as well as private banks are involved at their respective capacity and ultimately the investors of those bank are in trouble. For example yes bank in private sector and canara bank in thr public sector. This comment box is not sufficient to discuss about this large issue.
There seems to be much more to all what is said. Major cover up operation is underway according to my limited understanding of this grave financial situation in the country
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.
During a three year tenure this great expert took one year to understand that banks were not recognizing bad loans and how the corporates had taken the banks for a ride and do not know how long more to give solution.
If Modi is expected clean up the deliberately created mess of 70 years, then it is an admission that Modi has the capacity.
Why did nobody expect the great Doctor and his Masters to resolve the same mess?
It is not suprising. People like him are the real problems. Bank havr only financial personnel with no technicsl background and no regular checks and balances are done. Next is the investors who wants 20 plus return and the books are cooked the banks and the auditors. Most of them are CAs.
Best possible is to review prior to giving loan, type of review and responsibility. Companies appoints ex bankers in the board with no knowledge of the projects but just to get retirement money.
“With the benefit of hindsight, it can clearly be said that this exercise should have been initiated at least three to four years earlier.”……………The magnitude of NPA mess was not unknown to UPA government. It looked the other way to window dress GDP growth rate (debt fueled) and threw fiscal prudence to wind by printing fiat currency. The double-digit inflation during the last years of UPA rule bear testimony to these facts.
Rajan is like the archetypal politician who always wants to remain in the limelight when not in power by giving interviews to the press, criticising every move the government takes even if it’s a good move and organising protests, dharnas, fasting and the likes. He has never uttered a single word as to when this NPA saga had begun. A over 10 lakh crore NPA cannot happen overnight. Rajan knows very well how, when and why this malaise in our banking system has taken place. But he won’t say anything since he still covets a post like the a Niti Ayog member or Chief Economic Advisor or such prestigious position or even the FM’s post. He still hopes that the BJP would lose and the party of his choice would come to power. I don’t support some of the present government’s economic policy, primary among them its demonetisation move in November 2016. But I subscribe to the steps taken by them to tackle the coronavirus outbreak. In this also, Rajan has given his negative views without offering, as usual, any solution or suggestions how best to stop its spread.
If keeps mum he would be dubbed Mauni Baba, if he is boisterous he would still be criticised like in this post!
You expect every individual, company to have TWO traits: Honesty and Efficiency. Both have been missing in PSU banks since seventies. Throwing good money after bad has been routine over the last 50 years.
It will be interesting to know how much of the bad and doubtful debts have been recovered during the last five years. Otherwise, you will be only passing entries in the books of banks to provide and write off bad debts.
You expect every individual, company to have TWO traits: Honesty and Efficiency. Both have been missing in PSU banks since seventies. Throwing good money after bad has been routine over the last 50 years.
It will be interesting to know how much of the bad and doubtful debts have been recovered during the last five years. Otherwise, you will be only passing entries in the books of banks to provide and write off bad debts.
P chdambaram to be blame for this mess.
So why not the current disposition engage him as the FM and hold him responsible for clearing the mess. Will be that not be different and wise?
When Mr Rajan took charge of RBI,on second month why he didn’t appoint RBI one inspector for each psu banks for each region to sanction loan from Rs one crore above.Why RBI didn’t made rule until unless approval is not made disbursement can be made.Banks are blindly going through papers only,they don’t enquiry the realibility of borower,they should keep 100 present immovable property value declared by development authority, town planning authority & security document to be certified by govt lawyer . During his tenure loan was sanctioned against keeping brand as security.The whole problem in our system the person who is having degree of renowned University of foreign origin or inside India are given top post, they don’t have ground reality, that’s why we could not able to overcome of note bandi, harrassing the poor people who require loan & also they will make payment intime,also harrassing for education loans.Bank should ensure hundred percent security is mortgaged,then there will not be NPA.This things were I shared as per my experience in banking since last 43 years.During manual time NPA was very less.If anything wrong I have stated above,then question me I will proof 100 percent reality of my remark
politicians,bank officials and big business have looted the country – an ordinary person approaches banks for a small loan ,banks will ask for all sort of proofs to show he is worthy -big loans are passed over to the three piece suits over the table in five star hotels – every party in power is responsible for this state of affairs -looters are having the last laugh
You are right brother. I want to take a home loans. But Banks deny because I have not salary slips or business proofs. Whereas I have ability to give the EMI but no anyone listening my matter. It means banker’s take a lot of commission to give the loans.
These things started after 2000 under some great calculating people guidance to
Recover loan get another loan more than that by making some Bill’s of sales.
Same done in agriculture sector the value assets increased on paper every year without showing any official crop income
The officers working in PSB have substandard knowledge n most of them r corrupts. The government n subsequent government tried their best to hide bad loans. Willful default is termed as business loss by corrupt bankers n government.
More n more money is just printed n given to the pSBs to cover the losses in turn increasing the inflation. The whole banking system flouted n subsidy is given to start business or to siphon funds in the name of economic development. This doesn’t lead to economic development but degradation of economy n inflationary pressure on the citizens. The promoters should be completely held responsible for their loans taken and every penny should be recovered till the promoter n family is on thr street with bowl. If thy r not sure then don’t do business or out their own money.
Sir. You are the main accused. You did not do your job faithfully and now you are finding faults. You should be put behind the bars first.
Had Mr.janakiramam aka Raghuram Rajan been the FED Chief he would be counting bars in Jail. The joket was brought by another 50 lakh toilet clown Montek Singh Ahluwalia. He was in India since 2006 working as economic advisor in MEA since 2007.All the big scandal took place since 2007-2014 . Did he not read newspapers or didn’t he have time to read newspapers or he did not know English. Lastly why did he sign gold Scheme?
Smaller banks should be merged with the larger banks,such us IOB with the sbi.I think that is the only solution.And now banks should be careful in lending and should recovered past dues.
Thanks
I totally agee with ak.dev that if Dr.Rajan had behaved sensibly during his term as governor and not followed directionless Manmohan Singh and stopped Chiddu crook’s phone calls to banks things would have been better.
Now truth coming out,all involved bankers,borrowers booked,jailed & properties to be attached ASAP.
Modi insted od doing such good jobs,he is only interested in Party building, Dictatorship.
Badloan / npa we should see from a neutral eye as this is national problem , non of the government tried to substantially not even marginally reduce npa,if you have to rise , you must have a politically god father as in case of Adani , Rajan is being replaced , patel compelled to resign,nitiayog chairman willingly left ,there is a ? Why, are these illitrate politicians more intellegent than our Babu’s? Yaha kisi ko desh ki nahi padhi,first they are self centred ,secondly their political philosophy.
Let us be creative not critic,
Rajan is constantly trying to block holes of his failure with darkness
Rajan is constantly trying to block holes of his failure with darkness
1. The bank Officer had no skill set.
2. The top echelon of banks are corrupt or compromised to be on realm.
3. The reschedule of loan including as a part of loan instead of recovery efforts continued as at branch level tenure is short supervision n control is weak. The Regional n Zonal level were aware but no one is willing to open Pandora’s box
4. The project evaluation is tailor made n tacit support of everyone.
5. It is a planned n organized loot. Basel norms remained on paper.
Yes very true mr Rajan was also culprit and he should also be punished
The top management used to understate NPAs for a long time.Strict instructions are given to all the Executives down the line to show the least amount of NPAs.In the process,many short cuts are used to suppress the NPAs.With this Banks are showing good profits and Government was getting good dividends.The Executives were earning very good incentives for generating “Profits”. Everyone inside the bank knows this manipulation.But a stage came in 2014/2015 to call a spade a spade.The political leadership also wanted to filter the NPAs strictly.Then started the increase of NPAs in geometric progression.
He is projecting himself as a candidate for finance minister job. Which he will not get as long as this govt rules because he has proved himself he behave as puppet in hands of earlier FM. independent decision were not taken. When Modi started asking difficult questions he simply quit and ran away. His left leaning and pessimism is virtue the print or telegraph he is getting place on front page
Don’t be a bhakt ,who is responsible for today’s economic downfall . Try to accept the truth
Modi is not skilled enough to ask difficult Questions. We saw the exodus of two RBI governors and one deputy Governor. All because the Govt of the time wants to hide the crisis as it has no way to deal with it
From this article ,it is very clear that India’ s growth story was directly proportional to the NPA that generated in the system. The growth story is totally artificial and false. That’s why the stupid economists are crying hursh ,there is no growth in Indian economy. It is an opener that banks are not lending money indicrimi ately to the corrupts hence no growth..
Why only public sector bank was taken for ride .had Private sector bank would have also been asked to do probably PMC /Yes Bank could have been saved . Mr Rajan was dictating only PSB since he had faith in Private sector banking which turned to be fatal . Now again over 2 lakhs crore Will be added.and soon axis n Indus will join with Katie n Laxmi.
Every CEO of the bank is aware of the NPAs and knows why recovery is impossible and keeps on restructuring the bad loans.There may be many reasons for the CEOs to keep quite.RBI must publish the list of defaulters and it may put moral pressure on them to repay. By doing this the public will be aware of the good and bad banks.
Let us appreciate whatever Rajan has done. The crab mentality in has to be scrapped, or else it will be like the accumulation of bad loans as priced gift by the PSBs.
Mr Rajan has done a wonderful job, made his efforts to clean up , I hope others too follow it up.
1 . VIGOROUS. STEPS SHALL BE TAKEN TO RECOVER ALL LOANS FROM THE CORPORATES AND IT IS THE ROOT CAUSE FOR BANK FAILURES.
2. THEY LOOTED MONEY AND INVESTED IN FOREIGN ASSETS..THIS IS A BAD TREND AND CANNOT BE ENCOURAGED BY ANY GOVT .BE CAUTIOUS
So why aren’t the previous governors of RBI (before Rajan) being held accountable for dereliction of duty instead of being given awards? Shameful
All these money were looted and siphoned off to foreign banks. Properties were purchased with public money and nobody asked why.
In the background of various comments on the subject, I think a point has been missed . Rs.10 lakh crore is the is the total bad debt. Some percentage of this must have gone to bank officials who had some role in the elaborate loan sanction process. I would like to know as to whether any survey has been done of total amount of money that had gone into the pockets of the concerned bank officials.
Good job Mr Rajan. Thank you
Since Dr Rajan is positioning himself to be the finance minister of the country, in the remote possibility of Congress or any non NDA front coming to power, all these are nothing but attempts to build up his image. That is why he is forever commenting on India after he has left her shores. But he does not have the guts to come clean on exactly how PSU banks came to have these NPAs and what was the role of Congress and Shri Chidambaram in them.
Meaningless allegation. Never looked at his honest efforts. Now everybody knows who are going for image making.
Wild imagination. Meaningless allegation of a blind bhakt. Never looked at his honest efforts. Now everybody knows who are going for image making.
Only Feku has the guts. That’s why he doesn’t even do a press conference. Coward!
Are you a andha bhakta that you cannot understand the NPA’s and only thinking of pre 2014.
Currently the covid load in India is above one trillion trillion.By end of year 5 00 bt will die of heat sunlight and other radiation. 3 00 bt will be taken care of by body immune system. 100 bt will die of competition of it’s neighbours. 50 bt will be dead by sanitizers and other disinfectant s . 20 bt will be dead in burning ghats or in hibernation in coffins.. Only 19 bt will stay in Indian protoplasm for any Future opportunity. Needless to say the remaining 1 billion trillion covid will go back to lab for mutation .
Nut, log off instead of scaring public
During 2003-08 I worked for an MnC global consulting services company. Most of the projects I would get from were those which went to various Banks and other Financial Institutions for project funding
Remember this is the time when India grew st a rapid phase. I must have advised almost 100-120 businesses in those 5years. Almost 35-40% were classified as risky to finance. I would say that almost 55% would be below the safety line. But yet they got finances from other lenders.
Bankers were in a competitive mode to finance projects. In some large capital projects top bankers were involved. Everyone knew what was happening. Those are the projects which have turned into NPA today. When I read the names of some of these companies or their promoters I recall having personally met a few.
When people say BJP and Congress I find it amusing. No matter what the government when the economy grows promotors fina a financier.
Even today this is happening albeit the pace and scale is smaller. It’s up to the bankers to decide. I went to Singapore to support a company on a roadshow to shore up capital for the project. So many companies recived funding with relative ease. I thought it would be much difficult than here.
The bankers who fund are the best brains and experienced. I don’t know what to make out of this. Bringing politics into this is absolutely unnecessary. It has no impact.
How can a banker give more loan to a company whose equity is far less than Rs 2000 crores and debt is already Rs 40000 crores. Even a X+II class student of commerce will be able to understand the disastrous implications. But this was done by the bankers both public and private sector ones.
Agree.To improve the situation first politicizing must stop.Banking & Finance is a professional job.Economic environment has to improve.Ruling administration must focus on professionalism rather than politicizing.Existing Indian laws don’t encourage efficiency & productivity which are essential to ensure success of commercial business.I strongly believe that businessmen learn & master the art of dishonesty,corruption etc from politicians & bureaucrats.India will really grow if governments encourage only merit & don’t compromise on competency.There is no need to take any disruptive economic decisions in a large country like India.Instead incremental,continuous, positive policy actions needed.
If an owner of a startup visit a state-owned bank, there is almost zero probability of him or her successful in availing a loan. Not even 25k. The bank manager should be knowing there is 100 percent chance of recovery as the loan seeker will not endanger his/her CIBIL score for default. Thus bank managers are doing the disservice of depriving their bank of income from loan interest. Certainly, there is a chain operates in which these bank managers together with few other employees accept bribe for passing the loan. Such bank managers will have any reason to disqualify a valid application.
Why investor do not make deposit for 10 years? As a ex banker i have mde deposit for 10 years without any interst risk upto that.
You may risk your deposit itself!
Unfortunately bad loans in Indian banks are man made and they are nothing but organised and well planned loot. Both the managements and borrowers have to be blamed for this and the authorities for very obvious reasons pretend to be unaware of the problem because of the very obvious reasons of interference by politicians and bureaucrats. It is not an insurmountable issue but intentions are not there. An inbuilt solution to contain this festering issue was suggested and brought to the authorities notice way back in the early 2000s which was also in and with the knowledge of well knows experts in the banking has been very systematically ignored all these years . As long as depositors and innocent tax payers bear the brunt SILENTLY this loot will go on unabated.
As a genuine tax payer I think we should have a right to withdraw tax paid if it is not being used for right intentions
Good
Congress did the actual damage and BJP sat on the damage doing nothing to reduce the damage. Do, Congress and BJP, both are responsible for the total mess in banks today. For BJP, simply saying Congress is responsible is not enough. They will have to answer what action they took in solving the problem ! That is NOTHING !
This is somewhat like recycling Ramayana and Mahabharata on TV. Dr Rajan’s contribution to starting the practice of identifying NPAs is well known, and well appreciated. I don’t know what is the purpose of this article.
To serve himself.
Present Governor is like kids he cut interest rate he should close all bank
Wow he did so much good for us by Leaving the RBI and instead provide such delightful insight in interviews and press statements
Such a contributor to the nation !
He is boiling his own food.
In any other country Dr Rajan will be considered a national asset.
How come loan defaulter big bigs continue to support a lavish life style while the middle class is dragged out to pay their bad loans? This is the idea of India that Congress promoted for decades and now they want to protect this Idea of India. Dr Rajan may talk sensibly now but he had behaved like a pet and followed directionless Dr MMS ji and couldn’t stop Chiddu crook’s phone calls to banks.
Those calls were from MoS