FIRs are not the solution, nor is bringing in the CBI
Bad loans at banks, particularly public sector ones, are rising very fast, and it is galling to see defaulters continue to lead the good life after failing to repay banks tens of thousands of crores. And, it is likely, as the CBI chief pointed out the other day, that there are cases of fraud. But being tough with wilful defaulters is one thing—finance minister P Chidambaram told the Parliamentary Standing Committee that he had instructed banks to be strict with them—and calling in the police is quite another. Public sector banks, the financial services secretary told FE, have been told to file FIRs against wilful defaulters. Earlier, as FE reported, the CBI had asked vigilance officers of banks to provide details of firms whose loans had been referred to the restructuring cell, to investigate whether there has been any foul play.
There is little doubt banks have been negligent in their lending, how else can a firm like Electrosteel Steels whose net income in the June quarter was R133 crore possibly get a R8,000 crore loan? Similarly, an analysis by Credit Suisse show that for several of India’s top infrastructure firms, the Ebit-to-interest is well under 1—that is, the firms don’t even earn enough pre-interest profits to pay annual interest charges. There are obviously lessons to be learnt, and hopefully the committee RBI Governor Rajan has set up will have some guidelines. It is equally true the mammoth delay in government clearances has turned a large number of assets into NPAs—how do you service a power sector loan if the plant has no coal? None of this, needless to say, precludes the chances of genuine fraud. But make filing of FIRs against “wilful” defaulters a preferred option and chances are banks will be filing such FIRs with gay abandon instead of focusing on how to make recoveries, or the government on how to unclog debt recovery tribunals that are at the heart of promoter defaults.