Why are NPAs Skyrocketing?
Yes, the Modi government has been in power for six years. Yes, the Non-Performing Assets (NPA) of several Public Sector Banks from independence to Fiscal Year (FY) 2008 cumulatively gross advances (outstanding of bank loans) of all scheduled commercial banks was a mere Rs.25.08 lakh crore. Yes, the cumulative NPAs for six years, i.e., from FY2008 to 2013-14, rose sharply to Rs.68.76 lakh crores, which amounts to an increase of 274% in just six years. And yes, the Modi government inherited a gigantic NPA mess, when it settled into the North Block and South Block in 2014. How did things come to such a pass?
Herein lies another hidden gem, a tool that the then Finance Minister used to enrich himself, his family, his party, and his master. An article in PGurus broke down the self-proclaimed wealth of the Chidambaram family of Rs.6 Lakh crores, of which kickbacks from giving loans to cronies were estimated at Rs.2.5 Lakh crores.
A brief look back at the 2008 financial crisis
Except for a few flirtations with exotic financial derivatives such as Collateral Debt Obligations (CDO) by a few banks, the 2008 financial crisis barely scratched the surface of Indian Banking. Barring a year or two or three, P Chidambaram (PC) was at the helm of the Ministry of Finance during most parts from FY 2008 to 2013-14. The steep rise in NPAs since 2008 is mainly on account of misuse of the banking system by PC using the global financial crisis (he never let a crisis go waste!) and fear of the unknown as excuses, and taking advantage of the lack of understanding within our political class of financial systems. He created the mechanism of consortium lending to increase the ticket size of big loans from Rs.4000 cr. – Rs.10000 cr. to a corporate group till 2007 to Rs.40000 cr. and to diffuse the responsibility for credit evaluation and monitoring. He ensured that there was reckless credit expansion in violation of prudent credit evaluation norms. He convinced, and in many cases, crushed the dissent of many in the political class, in bureaucracy, and technocracy on the ostensible grounds of protecting financial stability and ring-fencing India from the global meltdown. India didn’t even participate! Then how can it suffer a meltdown?
Instead of expanding credit across the board, he used consortium lending to benefit a select few favoured corporate groups for quid pro quo. For example, he influenced, through phone banking, the consortium leader of 11 banks to lend Rs.40,000 cr. to the Videocon group to finance a totally unviable oil exploration project. The exotic project-report of exploring off-shore oil in the water bed near Mozambique was given to obtain a loan and thereafter default was committed within 2/3 years as no oil was to be found.
This is not an isolated case where PC had used consortium leaders to lend to his favoured corporate groups. There were many groups which were granted up to Rs.1 lakh crores – the ticket size which was unheard of for 60 years since independence till 2007.
In reality, the steep increase in NPAs was the net result of fraud, conspiracy, and money-laundering by PC and the promoters, and, use of phone-banking and consortium lending.
Increase in NPAs, not related to Coronavirus-induced crisis
Now the abnormal, and steep increase in NPAs are sought to be attributed to the global financial crisis and macro-economic conditions like slow-down in India and the world. Though a part of the NPAs may be on account of genuine business failure and worsening macro-economic environment, it cannot fully explain the exponential rise in NPAs. In many cases, ab-initio, the asset quality was doubtful; it is not that it deteriorated due to the external environment. A case in point is infrastructure. It would be naïve to explain the NPAs in infrastructure to sectoral problems, as it suppresses the basic credit evaluation problem of asset-liability tenure mismatch. In reality, the steep increase in NPAs was the net result of fraud, conspiracy, and money-laundering by PC and the promoters, and, use of phone-banking and consortium lending.
IBC Creation a ruse
In order that the promoters of his favoured corporates walk out free of their liabilities to the bank, PC got the Insolvency and Bankruptcy Code (IBC) law passed in 2016. IBC was enacted to legitimize the hair-cuts. This is not the intent behind the legislation in the developed countries on the issue of insolvency and resolution of corporate stress. In India, moratorium and immunity from civil and criminal actions were provided in the IBC during the Corporate Insolvency & Resolution Process (CIRP). The design and implementation of IBC in India have created a moral hazard problem by blurring the line between first genuine business failure and second deliberate, fraudulent, and planned business failure.
PSBs are holding the bag
Most of these loans were granted through Public Sector Banks (PSB). These are capitalized by the government through taxpayers’ money to make up for the deterioration in capital adequacy due to the rise in NPAs. Thus, the net effect is the promoters and PC have enriched themselves through public money.
IBC has set a stage for a vicious cycle of NPAs, which PC would have exploited fully had the UPA come back to power.
The need of the hour
There is, therefore, need to:
- Review the functioning of consortium lending.
- Review the provisions of IBC.
- Conduct investigation on the ultimate beneficiaries of the hair-cuts – including links with PC, his son Karti and various entities owned and controlled by them – with a view to initiating appropriate civil and criminal actions.
 What is Chidambaram really worth? – Jul 16, 2018, PGurus.com
 The deceptive lure of Indian Banks’ international businesses – Jan 15, 2014, LiveMint.com
 How Chanda Kochhar was caught in the loan grating frauds – Jan 24, 2019, PGurus.com