Finmin vote of no confidence on bank operations
If people wanted more evidence of former CAG chief Vinod Rai’s allegation that cronies were using their connections to get bank loans, the finance ministry seems to have just provided some of it. According to a news report in Mint, the department of financial services has written to banks asking them to not evergreen loans—that is not the same as providing loans to those not eligible for them, but it is an integral part of the culture of corporates not repaying their loans, but getting fresh ones, sometimes also in order to prevent the original loan from going bad in the banks’ books. While banks sometimes are keen to provide more loans if this helps prevent the original loan going bad, in too many cases, there has been political pressure to lend to certain projects/groups. In the past, for instance, banks lent to projects where all clearances had not been got primarily due to pressure from the government. In other cases, where debt has been converted to equity at values much higher than the prevailing market price, there is no other explanation for the banks’ behaviour.
In which case, the finance ministry’s letter can either be seen as being hypocritical or it can be seen as an attempt to help banks clean up their books, a promise to banks that there will be no political pressure on them to give loans or to make fresh sanctions to business groups. Given that gross and restructured NPAs of public sector banks are well over 10% of total advances, it is time banks took corrective action —as former deputy RBI governor KC Chakrabarty pointed out many times, both the pace and quantum of restructuring was a cause for concern. Given banks will need to provide for any loans that turn bad, there will always be the temptation to evergreen; and since a lot of this will take place under the Corporate Debt Restructuring (CDR) cell, there is a sense of comfort doing this. Smart banks, however, would do well to take the ministry at its word and be bolder in pulling the plug on doubtful loans and, by using the ‘wilful defaulter’ weapon more often, get defaulters to pay their debts on time by, if need be, selling off assets.