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
Team PGurus keep on writing about PCs’ atrocities and looting India, but why/how is it that these so-called looters are still roaming around the country, criticizing BJP Govt. without being assigned to Russian labour camps, or at least sent to the luxurious Indian jail ?!
We the poor reading public are starting to believe that BJP Govt/NaMo is not really keen about punishing the corruptors and country-looters.
Do you think our judicial system is not to blame? The single thing the BJP failed is to bring judicial reforms, lots of things can be made online. To me as a s/w guy i guess judiciary can be mostly made like a simple workflow. If a person aged x, made a offence y he has to be behind bars for z-a to z+a years. Like that most offences can follow simple process and no high court/supreme court should deviate from that. They can take considered only within that range. Also this will get rid of lot of non-productive judiciary related jobs (which to me is not worth for any country).
To blame BJP for not booking them is pathetic, blame the judicial system.
Why blame only Arun Jaitley? Does not the buck proceed to the Top, the All powerful PMO? AJ was the portal, contact-pointsman in Delhi to get things done for BJP, VHP, RSS, ABVP folks while UPA was in power between 2004 and 2014. So, it is indeed pay back time when BJP took over in 2014. Who bothers about the views of the common folks like Prabhu, Mahesh, Naresh, Venkatesh? That is what the NEXUS of Top elite Bureaucrats, Netas across party lines, Judiciary, Police, Corporate honchos decide in terms of governance of India. As the sweet time passes, like the 2G scam, all the major corruption cases pending will be closed due to in adequate evidence. Delhi Lutyens lobby is more powerful.
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While Chidambaram and his ilk being the most corrupt is being “reported”, and we see that we are in the mother of all fiscal crises.. what is defeating is these crooks seem to get away with it… we dont want to punish them, atleast get back their loot …. OMG what excuse can NaMo have now.. he has the stability, he is selfless, he is a patriot and he has a business driver – Corona….. get the money from these crooks, if law is take its course.. please understand this goddamnnnnnnn law is only for those who follow it… idiots like me…. not for these corrupt politicians
All this know, yet BJP govt is unable to jail or punish or confiscate all the properties of this Chidambaram or at least make his life more miserable for him & his family. That is the tragedy of this BJP govt… all talk no action
Good God, after 6 years we are still blaming PC and the Congress. The Modi Government has been elected twice and the 2nd time around with a majority of its own. I enjoy reading Pgurus, but articles such as this seem petty
People hope to blame Congress (Nehru to Sonia/Rahul/Chidambaram) for another 50 years when a new party is expected to win power to perpetuate blame game cycle. A balanced article of growth of NPAs under UPA and NDA that can point to systemic failures in checks and balances and not a one sided story is the need of the hour.
The loan portfolio of YES bank has increased from 55000 Cr in 2014 to 2 Lakhs 4 thousand Crs in 2019 during NDA regime. Doesn’t the buck stop at the door of the Chowkidar to explain this? Someone commented on Chanda Kochhar. Didn’t Arun Jaitely, sitting on his hospital bed in the US, severely criticize CBI for starting a fishing expedition? How do political parties get money for making and unmaking of governments through resort politics? The rot runs deep. As long as money power creates a big entry barrier for honest and young people to enter politics, corruption is here to stay. I don’t eat money as I am a bachelor but will allow others to eat money (through shell companies) to keep me a leader will not help to route out corruption in the country. Nowadays scams are not done in large scale – scams are divided and conquered to keep them below the radar. With subservient media, scams are kept under the carpet.
We can debate till cows come home. If Ms Chanda Kocchar is accused of taking Rs 60 Cr as kickback for some Rs 3000 Cr, PSU banks have lent more than Rs 30 lakh crores, some of them like to Videocon, under dubious circumstances. By applying the same ratio of kickbacks, one can easily imagine the amount that was siphoned off from tax payers’ money.
Is it not possible be to trace the money trail. Absolutely possible. But with reps of Finance Ministry sitting in PSU Bank boards and their friends in investigative agencies, looters will continue to enjoy the fruit salads of their corruption. Doesn’t BJP know this? Of course, it does.
What’s it doing then? Preparing ammo for 2024 election speeches!
Narendra Modi government is in power for the last six years and if they cannot do anything about this, then they are no better than Congress. This government is not acting on corruption cases, in fact no case has been filed by this government but actions are initated by courts in the cases filed by Dr.Swamy. They can bring all the money stashed aborad in tax havens in one stroke of pen but this government does not have such intentions.
In 2016, NDA was in power. How could PC bring in IBC?
That’s a good query, may be Team PGurus have considerd PC and Arun Jaitley as one and same !!
Ask the right question – who was the Finance Minister in 2016?
Naresh has already replied it 🙂