Level Of Bad Loan Is Not Scary

Indian banks' bad loan level not 'scary', says RBI Governor Raghuram Rajan-Financial Express---My comments on this news appears Below the news

The level of bad loans at Indian banks is a "concern" but is not "scary", Reserve Bank of India (RBI) Governor Raghuram Rajan said in a newspaper interview published on Sunday.
A prolonged economic slowdown has hit Indian banks' balance sheets, with stressed loans - those categorised as bad and restructured - amounting to about 10 percent of all loans. Fitch Ratings expects stressed assets to reach 14 percent of loans by March next year.

The bulk of these bad loans are related to infrastructure projects, which have made banks circumspect over lending.

"Is it of concern? Yes. Is it scary? No," Rajan told the Times of India, adding "...the point is there are two or three silver linings in the cloud of distressed assets."

He said many delayed infrastructure projects were "getting back on stream" as the economy improved, and booming equity markets will also help banks raise the required capital.

He also downplayed concerns that rising bad loans would lead to a liquidity crisis in the Indian banking system similar to the one witnessed globally after the Lehman Brothers went bust in 2008.

"Unlike the banking crisis in the West, where the worry was who would pony up the money, here there is no uncertainty," he said. "The government will do it. It has never let any bank it owns go under."

New Delhi has been injecting funds into state lenders to help them meet minimal capital ratios mandated by Basel III norms. This year it will infuse 112 billion rupees. But analysts say more funds will be needed.

With its finances in dire straits, the government plans to sell off a part of its holdings in the banks to help bridge their capital shortfall.

While a sluggish economy is the main reason for a rise in distressed assets, a RBI report last week also blamed lending to certain "excessively leveraged" groups.
The launch of a corruption investigation at state-controlled Syndicate Bank has raised broader concerns about weak oversight, graft and politically directed lending at state banks.

Rajan said a change in the process of appointments at these banks will help address the issue.

"When you are putting someone in charge of 5 trillion rupees of assets, you need an appointment process which is state-of-the-art," he said. "I think you can improve the process tremendously without going through the radical step of privatization."

My Views  are submitted below on above mentioned news and opinion of RBI Governor on whether level of bad is simply a matter of concern or is scary.

I completely disagree with opinion of RBI Governor that volume of Bad loan in Public Sector banks is a matter of concern but is not scary. Perhaps he is guided by NPA figures which PS banks are publishing in their balance sheet. Bank officers who work in the bank know very well that what is appearing in balance sheet is not real but a false story about bank's health .

Financials published by banks are manipulated and fraudulently and ornamentally decorated. Volume of bad loans is much more in fact. Top management of PS banks have let loose a reign of terror in their respective banks and created fear psychosis among junior level officers who in turn somehow or the other conceal the health of bad loan accounts and use various good or bad tools to treat even bad accounts as standard loan accounts. They are using same culture which they used to conceal bad loans before introduction of CBS technology.

Officers working in branches are afraid of action if they declare any bad loan account as Non Performing Assets. They have been taught to use method of restructure, rephase, ever greening of loan etc to keep the account always in standard category. A loan sanctioned for three to five years remain in good health even after lapse of seven to ten years. They are never taught to ensure proper diagnosis at proper time on th merit of each case. On the contrary they are given target for declaring amount of slippage for a year. They assign recovery target as the do for credit and deposits. They know very well in most of the cases bank officers are achieving targets by window dressing .

 Mr. S. K. Jain CMD Syndicate banks became ready to sanction Rs.100 crore to Bhusan Steel only to save this account from slipping into NPA category. Same methods are used in almost all branches of all banks to keep bad account in good colour.One branch manager may sanction additional loan even  in the name of different firm of the same defaulter to enable the defaulter to clear overdue in bad loan account.  Bank officers somehow or the other recover critical amount in some cases and postpone the sickness to next quarter. In this way , clever bankers are simply postponing the burden of action against defaulters to next officer who will come after his transfer .

Senior officers sitting at administrative officers similarly guide junior officers to somehow or the other come out of default and reduce its volume to such an extent that it does not slip into NPA in current quarter and so they manage the thing in next quarter. But none at any level makes efforts for permanent solution and do not make effort for recovery of bad loan before it is too late. Process of recovery and legal recourse to recover the bad loan from defaulters is so much delayed that clever borrower either sell off the assets or divert the money to some other place or the suit in court become diluted and time barred. Majority of officers pass on days till his transfer or retirement. They bother safety of their service and not safety of banks they work for.

I have therefore no doubt that volume of NPA if honestly declared , the level will reach upto 20 to 30 per cent of total advances  in each bank . Not only this , bank officials are not ready to reform and improve  quality of  even fresh credit decisions and hence they  add  new loans also into NPA category within one to two years of sanction of loans. This is why slippages are more than what is recovered in cash or written off.

Most of Branch Managers somehow or the other try that a few instalments are deposited by borrower at least till  the time he is transferred to other branch or they give long moratorium period to start repayment so that their tenure remain safe and volume of NPA does not increase till their tenure.  This is why slippage increases as soon as new incumbent joins as Branch Manager after transfer of existing BM.

RBI carry out forensic audit of a branch when some big exposure comes to light but do not like to take proactive step to go deep into the matter. If they carry out forensic audit of all branches of all banks , I think RBI will without delay admit the bitter truth that level of NPA in banks is not less than scary.

I therefore strongly believe that RBI will have  to give top priority not only in recovery of bad loans from bad borrowers but will also have to ensure that bank officials stop lending to bad borrowers to serve their self interest .

RBI will have to ensure that bank officers are paid respectable salary and respectable growth in career without any discrimination. Greed for money is root of bad lending and it can be stopped and reduced only by giving respectable wage hike and ensuring timely Bipartite Settlement.

RBI will have to stop flattery and bribery based promotion and recruitment . RBI will have to stop issue of whimsical and arbitrary transfer orders by top officials in favour of good officers.

RBI will have to look into the files of top officials to know how by evil ways and means they have got the elevated post doing injustice with hundreds of others.

RBI cannot solve the problems of bad debts only by bifurcating the post of CMD into Chairman and Managing Director or by diluting the stake of share of GOI in bank's equity.RBI will have to strike at the root from where the plant of corruption and bad lending emanates and will have to punish senior officials who irrigate and inculcate bad culture in low level and mid level offices.  

RBI will have to take all possible steps to turn bad culture into good culture in not only in lending decisions but also in recruitment, promotions and postings. RBI Governor says that appointment of CMD of a bank who is in charge of trillion of rupees cannot be taken so casually, Yes it is true , but it will be better to view the same in case of posting of an officer as a Branch Manager who is in charge of crore of rupees . If Branch Head is inexperienced, unskilled or ill-motivated , he can spoil the future of the bank. Ten such bad BM s can spoil the good work of 100 good BMs.

RBI will have to deal with shortcomings and inefficiencies of legal machinery where cases filed  by bankers for recovery of dues from defaulters remain pending for decades .RBI will have to stop exploitation of banks by politicians .

RBI will have to tell the politicians and banks that the loan sanctioned by bank is not the charity but have to be repaid by borrower come what may.

RBI will have to bring to task inspectors, auditors and vigilance officers who by taking bribe provide certificate of goodness to bad officials.

And so on..........................................