Banking, Uncategorized

Bad loans in banks

Banks, particularly PSBs, seem to be in the news for several wrong reasons, including bad loans, restrictions on lending, reluctance to lend and so on. Most PSB Chairpersons also seem to have gone into hibernation with no real attempts being made by any of them to change this narrative.

It is not as if bad loans in banks have suddenly come up. What matters is how the situation is handled by the banks, RBI and the borrowers. The bankruptcy and insolvency code is now being held up as the ideal solution, with the result that is fast becoming the only solution instead of it being the very last.

Raghuram Rajan should probably be remembered as among the most disruptive Governors of Reserve Bank of India (RBI). Riding roughshod like a cowboy, issuing g ultimatums to banks, has not helped the situation at all. All it achieved, at least in the short run, is that banks ended up with red splashed all over their balance sheets. Meanwhile Rajan merrily went on making one political statement after another making him a darling of Page 3 celebrity bimbos. The sort of dire consequences being bandied about if his tenure was not extended have all turned out to be so much nonsense.

Any viable solution to the acute problem of how the bad loans are to be recovered need a coordinated effort by the Government, RBI, banks and borrowers. If there are more than 2-3 borrowers in the same industry facing a problem is servicing their debt, it means that industry association should be called in to address common problem. Not every debt is because of fraud or misappropriation, there could well be issues that the government should take up and solve. Simply filing for bankruptcy is not the solution.

First of all, the whining by PSB Chairmen should be stopped. If any of them can’t take the heat, they would do well to quit. Pandering to their paranoia should be avoided at all costs. Let each of them take ownership of the bad debts in their respective banks and offer solutions. The government should facilitate interaction being banks so that it becomes a group effort. There has to be a clear distinction between longer term infrastructure loans and short and medium term loans and working capital loans. The problems in each such category need different approaches. RBI should be involved to help banks arrive at solutions. Simply threatening banks serves no purpose.

Every PSB Board has continuously had representatives of the Finance Ministry. What were they doing all this time to fulfil their primary responsibility? If some borrowers were favoured, why did they not raise red flags? All the larger bad loans were sanctioned and disbursed at least 4-5 years ago.

The Finance Ministry now needs to get their act together. If needed, retired bank officials can be recruited on 2-3 years contract, to focus entirely on loan recovery.

Banking, Uncategorized

Banks and Demonetisation

The recent demonetisation period from November 11. 2016 to December 30, 2016 prescribed for exchange/deposit of the now banned Rs. 500/1000 notes has clearly exposed the extent for everyone to see the rot and greed in some banking officials. Given this, it is shocking to read that the Ministry of Finance has put out a figure of just Rs. 71.5 crores as the amount wherein bank officials have colluded to fraudulently exchange these banned notes. This is obviously a grossly underestimated figure.

As we are now aware, bank officials have used various methods to assist black money hoarders to exchange their ill-gotten gains and sabotage the good intentions of the government –

  • Accounts which have not been operated for a year or more were identified by crooked branch officials and these accounts were allowed to be used by black money holders to deposit their hoard of banned notes withdrawing new notes to replace that.
  • In the initial days when multiple exchanges of Rs. 4,000 worth of banned notes were allowed, bank officials facilitated photocopies being taken of already submitted photo IDs, without the knowledge of the original ID holder. These photocopies were then put together and used for facilitating bulk exchange of black money.
  • Jan Dhan accounts were allowed to be misused to deposit amounts over Rs. 50,000 without any KYC stipulations, often without the knowledge of the account holders. These accounts were used to deposit black money banned notes and withdrawal of new notes.
  • Multiple new accounts using the same set of identity documents were facilitated to be opened at branches and these accounts were used to launder black money.

These are just some ways by which the system was misused in collusion with bank branch officials, and even a few RBI officials. Apart from this black money hoarders have also made use of their employees and even random persons who were ready to help them by standing in line for a commission.

All of these methods were widely written about in the press and in social media and banks should have taken note of them and initiated remedial measures as the misuse was happening. Quite obviously RBI was aware given some measures they introduce to stop multiple attempts at exchange and so on.

Banks on their own should have by now come up with what they have done to detect wrongdoing and the action taken. If they haven’t it is either that they are lethargic and uninterested in properly supporting the governments steps to curb black money or they are aiding or protecting their customer and staff, in the bargain facilitating a build-up of black funds again.

Every bank, including cooperative banks, is not fully computerised and has a central database. It is quite easy to get their IT department to run queries on the database to identify not just the accounts and identities that have been misused but also to trace out the particular branch officials who put through the transaction. Based on this information the banks should have already taken action against erring officials. If they have not done this, it is now upto the RBI and Finance Ministry to push them into doing this. A clean up of the banking system is long overdue and the demonetisation exercise gives the government a great opportunity to do this

I am not suggesting that all that is rotten in banks and the banking system will suddenly come to the fore and be eliminated, but a significant part of the rot can be corrected if the government acts quickly now.

Banking, Uncategorized

Banks and Demonetisation

An unfortunate consequence of this increasingly ugly political slugfest that any “discussion” on demonetisation has become is the dragging of an upright, well-respected RBI Governor into unnecessary controversy. A man too decent to counter all the moronic comments.

There is every indication that all due process was followed before this important decision was announced. The RBI discussed it and made a recommendation. Once the government accepted it, and decided on November 8, 2016 to announce it, approval was taken first from the RBI Central Board and then the Union Cabinet, both of which approved it. The President was also duly informed by the PM before he made his address to the nation.

There would be well be differences on whether the demonetisation was needed, and if there were shortcomings in implementation, however there was no slip-up in procedures. In any case, this issue of constitutional validity of the decision is already being considered by Supreme Court.

To therefore try to use the RBI Governor to score political points is extremely unfortunate. The present Governor, like most of his predecessors, understandably keeps a low profile, speaking when necessary. It is neither necessary, nor in fact advisable, for a Central Bank Governor to fashion himself as a Page 3 celebrity making controversial statements everyday as “evidence” of his independence.

Corruption in the banking sector over the years has been no secret. It is impossible for this sector to remain immune when general values in society were eroding. However, even people like me who have been associated with this sector for years, have I am sure been quite shocked at the extent of rot and greed in banking employees. For sure, the actual number of such black sheep is quite small from all indications, as compared to the total number of employees, and most of the employees have acquitted themselves very well during trying times.

As such feedback of wrongdoing came in, RBI was forced to react and issue some clarifications and make some modification in their notifications. This has understandably led to some confusion in the minds of the public. In hindsight that process could have been handled a lot better but given that an exercise of this size and scale has never been attempted before it was natural that there would be some leaning and correction as they went along.

In the coming days, we might well see many more officials getting caught and the law in that regard will take its course. Enough data and information has been collected by agencies for this to happen. However, it would certainly be prudent to ensure that reputation of banks in general and the RBI is not unduly affected. Banks will remain and will continue to play the role they are expected to in society and in the growth of the economy.