A large portion of the big ticket bad loans today involve loans by public sector banks (which control over 70% of the sector) to cronies patronised by the ruling political party.
The Indian banking system has been infected with bad loans or NPAs as they are popularly known. It is not that our bankers are incompetent and dumb and get easily fooled by borrowers. It’s a case of an integrity compromised banking system, due to collusion and corruption, where bogus loans have been willingly given. A large portion of the big ticket bad loans today involve loans by public sector banks (which control over 70% of the sector) to cronies patronised by the ruling political party. These politicians meddle in banks and compel them to lend to the cronies, the system’s favourites, even if they are unworthy/ineligible for the loans given to them. The fact is that like in the case of any other borrower, even if the cronies are eligible for loans and their projects are viable, the bankers must not dilute their due diligence/appraisal and professional scepticism before agreeing to lend. But that’s what is compromised, leading to bogus/fraudulent lending to cronies by the banks.
With the government ownership of banks, the dubious link between the neta, babu, banker and borrower, has been a fertile channel for all, for looting the system since decades. A crony is pushed/facilitated/patronised into the banking system, through what the PM calls telephone banking (calls to bankers by the netas/babus) and lakhs of crores of bogus loans have been recklessly/frivolously given to the likes of Videocon, Reliance Capital, Jet Airways, Essel Group, DHFL, ILFS, Bhushan Steel, Alok Industries etc., all cronies of the system and giant sums of public money have thus been lost in the process. The entire process of lending to the ultimate write off of the loans given has been in violation of the banking rules, making the cronies rich billionaires and the banking system bankrupt.
India’s Chief Economic Adviser Krishnamurthy Subramanian, while speaking at a FICCI event said that such lending to cronies was resulting in capital flowing to entities that were not the most creditworthy and this impaired the quality of lending on large loans. About lending to cronies, he further said:
- Crony lending exacerbates bad loans and also deprives a worthy borrower of funds/credit, because an undeserving one has already cornered it. The indiscriminate lending to unworthy cronies during the UPA era has created the bad loan crisis.
- Financial institutions must shun crony lending and focus on the quality of advances, to help create large scale infrastructure assets and satiate the appetite of a fast reflating economy.
- When the financial sector decides to actually lend to a particular borrower who is more connected, but not creditworthy, it means that capital is not being provided, which builds an opportunity cost due to inappropriate lending.
- While saying that bankers should not be harassed for genuine /honest business mistakes, he says that the compensation of senior management at banks/FIs must be clawed back in case they indulge in crony lending or evergreen loans with a malafide intent.
- He then puts the responsibility on the statutory auditors of banks to identify and report such lending, saying that they are the first line of defence and says that with data analytics and other tools available, auditors cannot say that this is something that they cannot do. The auditors are responsible for detecting the ills plaguing the sector.
The CEA gets no points for stating the very obvious that stares in our face. The dubious nexus of the corrupt/collusive neta, babu, banker and the crony borrower has duped our banks of lakhs of crores of rupees for decades and even now whether in active form or passive, patronising of cronies by the system continues. The most evident latest one being the dubious takeover and settlement of dues of Jet Airways by banks. The CEA rightly talks about responsibility to detect and punishment, but he does not speak of punishing the perpetrators and beneficiaries of the crime viz. the neta and the babu who introduce push/patronise/the dubious crony into the system. They are the root cause of the problem and powerfully operate behind the scenes in a faceless manner, leaving no documentary trail/footprints to hold them accountable/responsible. Giant bank loans frauds like in the case of Nirav Modi, ILFS, Reliance Capital, Reliance Communications, DHFL, Jet Airways etc. could not have been committed and continued for years, till there was a political/bureaucratic god father sitting on top and facilitating the cronies for mutual gain. The need is to stop them first from criminally meddling in the affairs of banks, which the CEA does not talk about.
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