Of late, the BJP government has announced the formation of India’s first-ever ‘‘Bad Bank’’. Named ‘‘National Asset Reconstruction Company Limited’’ (NARCL). Another entity – India Debt Resolution Company Ltd (IDRCL) has also been set up. The NARCL-IDRCL structure is the new Bad Bank. What is a Bad Bank? As we know, commercial banks accept deposits and extend loans. The deposits are a bank’s ‘‘liability’’ because that is the money it has taken from common men, and it will have to return that money when the depositors ask for it. Moreover, in the interim, it has to pay the depositors an interest on those deposits. In contrast, the loans that banks give out are their ‘‘assets’’ because this is where the banks earn interest and this is money that the borrowers have to return to the bank. The whole business model of the banks is premised on the assumption that a bank will earn more money by extending loans to the borrowers than what it would have to pay back to the depositors. But if the borrowers do not repay loan (both principal and interest), then the bank is in trouble. If the quantum of bad loans is not that much, the bank can afford to take such knocks and pay the interest to the depositors from its surplus or profit earning. But if the ‘‘bad loans’’ or NPAs rise alarmingly, the bank could sink. If almost all the banks face such a scenario, the whole economy would be threatened. That is exactly what has happened in our country.
Officially, the amount of Non-Performing Assets (NPAs) or defaulted loans of the banks is around Rs 8.34 lakh crores as on date. But in an interview to ‘First Post’, Dr K C Chakrabarty, former Deputy Governor of RBI said: “I’ll put the figure around Rs 20 lakh crore…One should include all troubled loans including reported bad loans, restructured assets, written off loans and bad loans that are not yet recognised.” Incidentally, as per report published in March 2020, the size of system level corporate loan book stands at around Rs 64 lakh crore. In other words, 1/3rd of corporate loans are defaulted or, as classified technically, ‘under stress’.
Why is this default? As per RBI report, the bad-loan ratio is supposed to have almost double to 13.5% of total advances by the end of last September. Moreover, who are the major defaulters? Not the common people who seek loans for purchasing houses, cars, motor cycles or household items but the industrial tycoons or corporate giants. India’s top 30 defaulters account for a third of the gross non-performing assets (NPAs) in the banking sector, according to data obtained from the RBI through a right to information (RTI) request. But the refused to make public the list of loan defaulters with public sector banks despite an order of the Supreme Court in to make this information public. Former RBI Governor Raghuram Rajan said he, during his tenure, had submitted a list of high-profile fraud cases to the Prime Minister’s Office urging coordinated action to bring at least one or two to book. Clearly, there is not only default of loan but even a large scale fraud plaguing the banking system.
Notably, if a small individual borrower or small scale business entity default repayment of bank loans, they are harassed, threatened even physically assaulted by the so called recovery agents of the banks. Also, the securities hypothecated for availing of the loan are confiscated. But when the big corporates who take loans of thousands of crores of rupees and then feature as defaulters, both the bank authorities and the bourgeois government take a lenient view. The default is often condoned by way of writing off the debts in the books of the banks. It is reported in the media that the total bad loans written off in the last eight years stand at Rs 10.83 lakh crore. RBI has admitted that ‘‘reduction in non-performing assets (NPAs)…was largely driven by write-offs [of] NPAs older than four years.’’
But even after all such write-offs (meaning virtually allowing the monopoly houses and multinationals to simply walk out with the funds of the banks accruing from the hard-earned savings of the common people), there is no respite from the soaring graph of NPAs. A study of top 500 private sector companies showed that about Rs 10.5 lakh crore of their debt could turn vulnerable, which means borrowers could face difficulty in servicing these loans These 500 debt-heavy borrowers have an outstanding loan book of Rs 39.28 lakh crore. Out of this, the existing default amounts to Rs 7.35 lakh crore loans. If the economic slowdown continues, the entire Rs 39 odd crores would be NPAs.
Notwithstanding all these findings and showering of amnesties on them by the government in the form of loan waivers, tax reductions and exemptions, the defaulter corporates and multinationals are pestering for fresh loans and that too at lower interest. The BJP Prime Minister has already stated that the monopolists are ‘wealth creators’ and hence they must be taken care of. How? As the banks suffer because of growing NPAs, the government often pumps in capital from public exchequer to these banks through ‘recapitalization’ route. From the taxpayer’s perspective, the most worrisome fact is that the government is using their money to improve the financial health of the PSBs which are made sick by the big corporates by not repaying loan. Secondly, the bank interest is being progressively lowered. Already the banks have virtually halved the interest on the bank deposits by common people in last 10 years to make funds available to the borrowers (read large corporates and MNCs) at a cheaper rate. In fact, interest on bank deposits has been so much reduced that earning has become negative if one takes inflation (rise in price) into consideration. So, if a bank FD offers a return of 6 per cent per annum and inflation is also 6 per cent, the net return is almost zero. At times, when FD rates are lower or the inflation is higher, the investment ends up earning a negative return. If a bank FD gives 5% return, TDS (Tax Deducted at Source) is 10%, and inflation rate is 5% then the real rate of return comes out to be negative 0.5 per cent. That is the position of the common bank depositors many of whom are retired senior citizens. So, the brunt of bailing out or aiding the corporate behemoths is borne by the common people in various ways. While they are being deceived in such manners, the government cares a fig because to it, the interest of the monopolist giants and MNCs is prime and sole.
Even after all these measures, NPAs are rising making the banks inching towards non-viability, if not delinquency. And the pressure for fresh loan from the corporate houses is mounting despite they being not eligible for that because of their track record of large scale default. So, the idea of floating a Bad Bank surfaced to artificially cleaning bank books of defaulted loans. What would be the modus operandi of this Bad Bank?
The NARCL will first purchase bad loans from banks. It will pay 15% of the agreed price in cash and the remaining 85% will be in the form of ‘‘Security Receipts’’. When the assets are sold, with the help of IDRCL, the commercial banks would be paid back the rest. If the Bad Bank is unable to sell the bad loans, or has to sell those at a loss, then the government guarantee would be invoked and the difference between what the commercial bank was supposed to get and what the bad bank was able to raise would be paid from the Rs 30,600 crore that has been provided by the government. Again this provision for financing the difference would be from tax payer’s money. In such a queer way, bank books would be cleaned from toxic assets and the banks would start lending again even to the big defaulters. It is stated that if the Bad Bank fails to recover the defaulted loan amount, they would seize the movable and immovable properties of the loanees. Why is it needed a Bad Bank for that? The lending banks themselves can do that as per existing rule. Why they do not do that is inexplicable.
As mentioned above, it is nothing but a ploy to ‘regularise’ planned plunder of public money placed with the banks by the corporate sector. On the pretext of recession and loss, the corporates are straightway embezzling public fund with the government as indulgent onlooker. And then the government with the help of the economists and experts on its pay-roll discover weird means to open fresh window for such squandering of public money. So Bad Bank is good for the monopoly houses and multinationals and not just bad but worse for the common people.