Bank loans turning NPAs doesn't mean corruption
There is little doubt more bank loans are turning into non-performing assets (NPAs) and, prior to that, they are being referred to the corporate debt restructuring (CDR) cell in increasing numbers. This requires banks to be careful while assessing the turnaround prospects of companies whose loans are being restructured, and it can be no one’s case that there is no possibility of fraud in some cases. But it is worrying if, as a general rule, investigating authorities such as the CBI think a restructuring equals a fraud. But, as FE reported, CBI has asked the chief vigilance officers (CVOs) of various banks to provide it a list of cases of more than R100 crore each that were referred to the CDR cell. In addition, the CBI has suggested CVOs sit in on meetings of consortiums when bank loans are being given. What makes the move all the more surprising is that when the CBI chief brought up the possibility of fraud in CDRs a few weeks ago at a public function, former RBI Governor and current PMEAC chairman C Rangarajan pointed out that in most cases referred to the CDR cells, the problem was brought about by genuine reasons. In some cases, this had to do with the lack of government clearances coming on time, in other cases, it had to do with the dramatic economic slowdown—when GDP slows from over 9% a few years ago to a likely sub-5% this year, it is bound to affect the ability of firms to repay loans.
If bank CDRs or sanctioning of loans are to be scrutinised by a vigilance officer to begin with, chances are it will make banks that much more reluctant to give loans or to restructure them when the going goes bad. In retrospect, it is easy to ask why certain loans were restructured or why banks didn’t move to seize assets instead of doing a CDR. But what needs to be kept in mind is that the process of seizing assets, much less hawking them to a buyer at a better price, is tedious and time-consuming. In FY12, for instance, under 17% of the amount referred to Debt Recovery Tribunals was recovered by banks, and the figure was under 30% in the case of Sarfesai. Given this reality, are bank officials who recommend CDR guilty of a crime or are they just protecting the bank’s interests? And when loans turn bad due to, for instance, Coal India not being able to supply the coal on which a power project was based, surely the banks can’t be held to blame—indeed, part of the work the Cabinet Committee on Investments is doing is to clear projects where banks have disbursed loans but the projects are stuck in red tape. Instead of the CBI or vigilance officials using what by all accounts are fairly blunt tools, it would be a better idea if banks set up expert committees to examine CDR cases—and there is a rich history, given how fast the CDR cell is being populated—and come up with some lessons/suggestions that bank officials should keep in mind for the future. If there is out and out fraud, that is something CBI has to investigate but the current proposal will cause more harm than good.