COMMENT FROM Mr G R Chari

A very good expose of the stench emitting from the rot in the banking system. The virus of non-performing loans (NPL) has now spread from the public sector banks (PSB) to some marquee names in the private banking space also. Though Dr. Rajan took hold of the reins of RBI in September 2013, it is only in recent times that he has become active in going after the banks with a stick in his hand. When the PM & FM called a meeting of the bank heads on January 1, 2015, no grave sign or concern of the NPA problem came to light then. It is, therefore, quite obvious that the banking heads were busy layering of the bad loans and trying to shove it down to posterity. The bad loan issue has created such a scare that it has now reached the portals of the Supreme Court of India which has directed the RBI to give a list of loan defaulters above Rs.500 crores in an sealed cover. The data from RBI showed that bad debts which stood at Rs 15,551 crore for the financial year ending March 2012, climbed to Rs 52,542 crore by end-March 2015. Of course, no reasonable explanation is offered for this surge in NPA's except to say that they are part of the normal provisioning activity of the banks. Possibly taking a cue from all this, the PNB was forthright in coming out with a list of 904 wilful defaulters owing ~ Rs.11,000 crores to the bank. In spite of the surmounting problems the bank's face, what is most regrettable is that there is no sincere effort to come to the grips of the problem except the beaten down path of transferring the NPL's to ARCIL or creating a Bad Bank or whatever. This  process or step is definitely bad as it absolves the responsibility and accountability of the Top Management of the bank. The worse thing is that,most of the NPL are under-secured with inadequate collaterals and this creates a serious doubt as to how much of NPL's will be recoverable. So, there is a real challenge before the govt/RBI to meet this crisis head-on.Tough problems call for tough solutions and, if the RBI and the government is sincere (which most govts. are not, due to political-business nexus), they really have only two or three choices before them:

1) Create or form a Recovery Cell or Directorate in each bank and give them a specific mandate to recover the bad loans within a specified time frame (of say, one year). The RC will be headed by a person in the rank of Executive Director with independent charge and he shall report to the bank's Board or a specific Committee of the Board on a regular basis. If the need arises, the ED will have the power to take the help or assistance of the CBI or similar investigating authority of the state to help in the recovery of bank loans.

 2) Repeal the Bank Nationalization Act of 1970 and, if that takes time due to Parliament logjam, amend the Act to bring down the stake of the govt. to 49% paving the way for privatization of 29 PSB's. Even the very intent of the govt. to privatize the PSB's will get a thumbs up from the market and will arrest the erosion that is taking place in the bank's market capitalization. With this measure, the govt. will still have a significant say in the management, running and overseeing of the bank's operations. The experiment of the govt. in appointing a professional banker to head Bank of Baroda has given a positive response to this approach. However, the State Bank of India can continue to be a state owned bank under the SBI Act and continue as a banker to the govt. 

3) As the above move will be resisted by the bank's union, it may be necessary to declar  and bring the PSB's under the National Security Act or such similar law in force. Simultaneously, each bank should aggressively pursue voluntary retirement scheme. In the absence of strict measures to contain the NPA problem, mere infusion of fresh capital into the banking system will merely amount to throwing good/scarce public money in the drain. The banking sector is a proxy for the economy and the strengthening of the banking sector will automatically strengthen the economy.

G R CHARI