Why can't banks take 'haircut' of petty dues of farmers?

Lakshminarayan is a farmer from Shimoga in Karnataka. He had taken a loan of Rs 35,000 from a local branch of Canara Bank. About a month ago, he received a threatening call from the bank asking him to pay back the pending dues or they will be forced to initiate action for recovering the amount. Panicked, he decided to rush to the bank, and knowing no bus was available at that time, he walked for 15 kms in a hilly terrain to finally reach the bank.

At the bank, he was told to pay Rs 3.46 of the pending loan amount.

This story is a grim reminder of the double standards the banks have in place when it comes to treating their customers. While the poor often receive inhuman treatment, which forces many of them to either land in jail or to commit suicide, the rich are treated with kid gloves and are allowed to easily get away with the bank itself taking the blow. Take the case of State Bank of India (SBI). According to a news report, the bank had written-off Rs 1.23-lakh crore of corporate bad loans in the past eight years. Despite we being told that technically speaking a bank write-off is not a loan waiver and the recovery process continues, all that the bank has been able to recover in these eight years is Rs 8,969-crores which come to a little over 7 per cent of the outstanding credit.

The biggest defaulters in this particular case being Bhushan Power & Steel Ltd with a outstanding loan of Rs 7,705-crore and Videocon Industries Ltd with pending dues of Rs 3,411-crore. As per an RTI reply, both the companies had failed to pay back even a single penny. In fact, out of the 56 borrowers, the list that was made available, the recovery from 36 companies was zero. For a balance of Rs 3.46 a farmer was asked to come to the bank and pay it up, but what happened to the 36 companies from whom SBI failed to recover even a penny?

Another news report, based on an RTI reply, had revealed that only 10 per cent of the bank loans written-off in four years, between 2015-16 and 2018-19 have been recovered. Out of a total of Rs 4,32,584 written-off in these four years, public sector banks could recover only Rs 45,659-crore. If 7 to 10 per cent of the total amount that is eventually what the banks are able to recover, the question that arises is why are banks trying to give an impression as if the write-offs of corporate debt is in any way different from the farm loan waiver? Using the ‘technical’ difference between a write-off and waiver banks have always maintained that writing-off bad loans does not mean that the recovery proceedings have stopped is in reality a very clever smoke-screen that is enacted to cover up the massive corporate defaults.

Strangely, this ‘technical’ cover up became a banking tradition over a period of time. But prior to that the RBI had in a circular issued to banks advised them to refrain from the practice. “Banks are required to extinguish all available means of recovery before writing off any account fully or partly. It is observed that some banks are resorting to technical write-off of accounts, which reduces incentives to recover. Banks resorting to partial and technical write-offs should not show the remaining part of the loan as standard asset.” Probably to cover its own lapses, banks have routinely been claiming that the write-off is simply a shift of the accounts from one ledger to another while the recovery goes on. But many banking experts believe that when bad loans are written-off banks actually remove the assets from the balance sheets knowing well they have lost all hope from recovering anything. 

This brings up a question. Why the banks should not be asked to first clear all options of recovery before announcing a write-off? Why deliberately create confusion in the minds of the people (as well as policy makers) by presenting a misleading picture of bank profits position by pushing the losses in a separate ledger? This is a mischievous practice and needs to be discontinued. I think the RBI needs to come heavily against the banks for this deliberate cover-up. But instead, banks are exerting pressure to set up a bad bank that takes care of the bad loans. Which means instead of addressing the fundamental reasons behind the malaise of increasing bad loans, banks are wanting another cover-up. Setting up a bad bank, in my opinion, is a bad idea.

In April, the Reserve Bank of India (RBI) informed that Rs 68,067-crore which were due from 50 wilful defaulters over the years has been written-off by nationalised banks. Many absconding businessmen, including the diamond merchant Mehul Choksi, are among them. Wilful defaulters are those who have the ability to pay back but don’t do so. Many banking experts have called for launching criminal proceedings against them, but it hasn’t been ever done. All India Banking Employees Association general secretary C H Venkatachalam was earlier quoted in media reports, saying: “It is known that bulk of these bad loans are attributable to big businesses and the affluent. Many cases of default are found to be deliberate, wilful and on account of diversion of funds. Unfortunately bank loan default is still a civil offence and hence criminal proceedings are not being instituted against them.”

Launching criminal proceedings against the wilful defaulters should be first step to stop banks being duped heavily by the rich and powerful. I wonder why the farmers continue to be penalised for petty loan defaults, while the rich get away so easily. If banks can take ‘haircut’ for thousands of crores of company defaults, I wonder why the banks can’t in general, and in this case Canara Bank in particular, take a ‘haircut’ of Rs 3.46? Why make a poor farmer travel all the way, spend a day’s hard labour, for just depositing a petty amount? When will the banks become a little sensible? #

Games Banks Play. Orissa Post. July 24, 2020
https://www.orissapost.com/games-banks-play/

कर्ज वसूली में दोहरा मानदंड, बता रहे हैं देविंदर शर्मा. Amar Ujala, July 23, 2020
https://www.amarujala.com/columns/opinion/double-standards-in-debt-collection-by-banks

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Financial aid to the poor is a subsidy, to the rich, an incentive

No jargon -- RBI should inform people in simple terms about the severity of the crisis that banks are faced with --pic LiveMint

Playing around with words, one has to marvel at the creative ability of economists, bankers and corporate managers who come up with phrases or terminology that hides more than what it reveals.

Well, as if the commonly used term -- Non-Performing Assets (NPAs) -- is not enough, the global banking group Credit Suisse has now come up with the use of a new term -- Impaired assets. And while you are struck at what ‘impaired asset’ means, India Ratings says in a study that 25 per cent of the Rs 10.52-lakh crore of corporate debt over the next three years is likely to turn ‘delinquent’, resulting in an additional Rs 2.54-lakh crore of ‘delinquent debt’. If you are wondering what ‘delinquent’ means in this context, let me explain. A loan becomes ‘delinquent’ when the payment is not made in time. 

It took me some time to figure out what impaired assets means. The term may already be in use by accountants but for an average reader it certainly is new. Despite a decline in gross NPAs, the total impaired assets of the banking sector, as of Dec 2019, comes to Rs 16.88-lakh crore screamed a newspaper headline. Reading carefully, it emerged that impaired assets actually means the total write-offs of Rs 7.77-lakh crore since 2014 plus the outstanding NPAs of Rs 9.10 lakh crore. Add both the figures, the total impaired assets actually turns out to be the cumulative loss the banks are staring at.

The question that needs to be asked is why bankers simply can’t say that the banks have incurred a loss of Rs 16.88-lakh crores between FY 2014 and Dec 2019. Even if technically speaking, “written-off’ allows the banks the right to continue with the recovery process, the total loss figure can be revised as and when the bank books are finally closed. In any case, recovery measures have not yielded more than 15 to 20 per cent of what is once written-off. So why complicate it for the general public? Let them know the severity of the crisis that the banks are faced with. After all, it is public money that goes into recapitalising the banks and people have the right to know. But hold on, did you hear any economist express concern at the fiscal drag the burgeoning impaired assets of banks will result in?

It has always been a clever play with vocabulary. When an ordinary borrower fails to repay the bank he/she is called a defaulter. A cibil score even provides a summary of your credit history. But when a company defaults on a loan, it is not called as a defaulter. It is labelled under NPA, which means it has faulted on a loan or advance for which the principal or interest payment has remained overdue for a period of 90 days. Within this category, there is a classification of ‘wilful defaulters’ who actually have the ability to pay back but they don’t. The government acknowledges that number of such ‘wilful defaulters’ has risen by 60 per cent in the five year period, 2014 to 2019. If there are ’wilful defaulters’ among the corporate why the NPAs can’t be simply clubbed as corporate defaults? Let the people know in a simple language they can understand the total amount of loans that the companies have defaulted in.

Further, to hide these ‘wilful defaulters’ the RBI has been withholding these names from being made public. A heightened fear is created as if revealing these names will jeopardise the economy. But when it comes to defaulting farmers, their names and pictures are displayed in tehsil headquarters. While the defaulting farmers with petty outstanding amounts often end up in jail, the banks take a ‘haircut’ to bailout the defaulting corporate with massive outstanding toxic debts. A ‘haircut’ means the loss a bank will suffer when a defaulting company fails to pay up. It is the bank that bears massive losses, while the corporate borrower is free of the financial debt. Wonder, why can’t ordinary citizens who are unable to pay back their home/car loans too get the benefit of a haircut?

As per news reports, banks are expecting zero recovery from the ongoing 354 liquidation cases under the Insolvency and Bankruptcy Code (IBC) resolutions lined up for 2020. This means banks will take a ‘haircut’ of Rs 3.55-lakh crore.

It doesn’t end here. When the poor are given financial aid it is dubbed as subsidy. And subsidy is a highly demonised word. The moment the government announces a subsidy for farmers or for the poor it is invariably followed by an uproar. This is a wasteful expenditure; this subsidy amount will widen the fiscal deficit; and where will the money come from are some of the usual questions. But when the government provides financial aid or grant to the industry, a different term is used -- Incentive for growth. While subsidies for the poor are considered bad for the economy, incentives are projected as an investment for economic growth.

Often on panel discussions whenever I would say that incentives for growth are also subsidies, my co-panelists would question my understanding of economics, saying that incentives are absolutely necessary for economic development whereas subsidies are a fiscal drain. This was very rightly answered by Prime Minister Narendra Modi while addressing the 2016 ET Global Business Summit when he asked whether this difference in language is a reflection of the difference in our attitude. When a benefit is given to a farmer or poor, experts and government officers normally call it a subsidy. But when a benefit is given to the industry it becomes an incentive. Saying that government support should not be viewed from any ideological position, the Prime Minister wondered how experts would react if fertiliser subsidy is renamed as ‘incentive for agricultural production’.

Imagine, if the incentives the industry gets were to be renamed as subsidies? Imagine if the food subsidy was to be renamed as ‘incentive for food security’? That’s the kind of mindset change the country desperately needs. #

Source: Of Incentives to firms & Subsidies to poor. The Tribune. Mar 16, 2020. 

https://www.tribuneindia.com/news/of-incentives-to-firms-subsidies-to-poor-56030?_gl=1%2Ay7p0lx%2A_ga%2ATFNMaXFnVi1DSDc3MTMwQzNVaGd6cnlQeWtmVDAyejNLRzdNaF9zZFRqd1BJTXZlTGV2bS1HQXptYnhwTXhjQw&fbclid=IwAR3PEXM1DyYzWnoJ-W3D_mi5XxWPo52aDCQZt8tSFTArW6FjnwbKRxgE1jI  

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