‘Blame the Reserve Bank, too’

KPM Basher B L  17 March 14

All India Bank Employees Association General Secretary CH Venkatachalam believes poor oversight by the RBI and government, banks’ lack of expertise in project finance, corruption and political interference have resulted in banks’ mounting non-performing assets.

What went wrong at United Bank?

My question is what has the RBI, which is the regulator of the banks, been doing all this time? Why didn’t the RBI man on UBI’s board alert his bosses on the goings-on? The central bank and the government miserably failed in their oversight. Bad loans do not occur overnight. Many of the middle-level, senior and top managers could quite possibly have colluded with the big-time corporate borrowers.

Why are NPAs rising in some private banks too?

Commercial banks are supposed to provide short-term loans — for working capital, for instance — to businesses, industries and farmers. Indian banks are doing pretty well in this area. But, a long-term, high-volume loan to a massive infrastructure project is a different kettle of fish. Banks’ costs and risks in project finance are high.

How can this risk be mitigated?

Project finance requires high levels of expertise in several areas. For instance, it requires long-term market analysis of services and products of the projects to which financing is provided. It requires risk assessment, tracking global market movements, environmental impact, etc. Most banks don’t have the expertise for such critical analyses.

Has the economic slowdown impacted NPA levels?

Macroeconomic factors affected repaying capacities of many corporate borrowers. Not all corporate borrowers are wilful defaulters; most of them really want to repay but are unable to do so because their businesses are not doing well. But there are many corporate crooks who know how to milk public sector banks. These criminals should be prosecuted and put in jail. The AIBEA has compiled a list of 50 top corporate defaulters and Kingfisher tops the list. Many of these are wilful defaulters.

What can be done to check NPAs?

First, vastly improve oversight by the RBI and the government. Second, amend laws to make wilful default of bank loans a criminal offence. Third, strengthen the mechanism of Debt Recovery Tribunals. Fourth — and this is very important — is the setting up of specialised agencies for industrial financing, infrastructure financing and development financing. Only such agencies should provide project finance. Banks should confine themselves to short-term and medium-term loans to farmers, and small and marginal enterprises.

(This article was published on March 17, 2014)