A fraud on the nation

The public sector banks are often under attack for the mounting bad loans euphemistically called non-performing assets (NPAs). But, the remarks of the Comptroller and Auditor General (CAG) of India have revealed the true face of this financial fraud perpetuated on the people’s savings. The CAG report has rightly stated that the significant part of the bank NPAs are a result of the loans obtained by fraudulent methods.

The CAG itself describes that the NPAs are a fraud committed against the public sector banks. The political economy of the NPAs substantiates this beyond doubt. The governments which enact laws, making the illiterates ineligible for contesting in the elections, do not wish to do so in the case of wilful defaulters. Instead, those who are indebted to banks to the tune of thousands of crores decorate the corridors of power, making the bad loans much more irretrievable.

All the NPAs may not be a fraud. Certainly, recession in economy contributes to bad debts. But, the politician-businessman-bank men nexus is behind most of the bad debts. The NPAs are playing havoc with the finances of the public sector banks which are supposed to be the guardians of the household savings. According to the CAG, 10 State-run banks suffered losses of over Rs 15,000 crore in the fourth quarter of 2015-16 due to provisioning to cover for the bad debts.

There is a saying in the economics. If you take a lakh of rupees loan, it is your problem. But if you take hundreds of crores of loan, it is the bank’s headache. The l’affaire Vijay Mallya is a classic illustration of this.
The stressed assets are not really the stressed, but largely created to indiscriminately favour the crony capitalists.

Instead of bringing a strong regulatory regime to deal with the problem, the government is floating fallacious theories. The government claims that it is infusing capital to revamp the PSBs plagued by stressed assets. But in reality, besides the NPAs, the government is also bleeding the PSBs.

According to Soumya Kanti Ghosh, chief economic adviser to State bank of India, the cumulative capital infusion into PSBs for the fiscal decade ended 2014 was Rs 60,000 crore, but the dividend payout was nearly Rs 64,000 crore, while the cumulative income tax paid was around Rs 1.3 lakh crore. Thus, the dividend and the tax paid to the government together amounted to more than 300 per cent of the capital infusion.

The major chunk of the NPAs is caused by targeted lending mainly due to political and bureaucratic influences. An analysis of the data clearly reveals that the NPAs are not the sin of the small borrowers though the banks’ resources are mainly contributed by small depositors. As on March, 31, 2015, the NPAs amounted to Rs 3 lakh crore.

Over 40 per cent of this (1.21 lakh crore) is due from 30 corporates, while over 30 per cent is due from about 6,000 individuals and institutions. The preferred corporates account for the most of the NPAs. The political clout they enjoy makes it impossible for the banks to retrieve the money. The NPAs are a criminal fraud on the economy.