Shadow economy threat: NPAs not turning around, banks 'wrote off' Rs 5.56 lakh crore

RBI governor Shaktikanta Das

Counterview Desk
The Financial Accountability Network (FAN) India, a collective of civil society organisations, unions, people's movements and concerned citizens, set up to raise the issue of accountability and transparency of the national financial institutions, has contested the Reserve Bank of India (RBI) claim that non-performing assets (NPAs) of banks have been reduced over the last few years.

Pointing out that, already, there is “threat from shadow banks”, with the danger that it would lead to “a massive hike in NPAs”, FAN, in a statement, said, while mentioning that the ‘NPA cycle is turning around’, the RBI has not said anything about the “massive write-offs done by the banks” -- to the tune of Rs 5,55,603 crore from April 2014 to December 2018. 

Text of the statement:

Shaktikanta Das, Governor of the Reserve Bank of India (RBI), while releasing the Financial Stability Report, recently said that by March 2020 the bad loan ratio would fall to 9 per cent of advances. For the non-performing assets (NPAs) hovering around 11.5 per cent in March 2018, 10.8 per cent in September 2018 and 9.3 per cent in March 2019, this seems to be big news for the banking sector, particularly if it is achieved through prudent ways.
The details of how it was achieved is a cause of concern as the NPA was not reduced through any major policy changes like expediting the recovery of NPAs or devising checks to avoid the repetition of past mistakes.
We, a collective of civil society organisations, unions, people's movements and concerned citizens, would like to stress that this announcement is misplaced and inadequate for the following reasons:
First, the threat from shadow banks, which can lead to a massive hike in non-performing assets of the banks. The possibility of an “idiosyncratic Housing Finance Companies / Non-Banking Financial Companies (HFC/NBFC) failure” has been developing from last financial year when Infrastructure Leasing & Financial Services Ltd (IL&FS) and Dewan Housing Finance Corporation Limited (DHFL) defaulted in their payments.
Banks, mutual funds and pension fund have invested huge money in NBFCs, including IL&FS. Banks, which already have high non-performing assets, are now facing a crisis due to their lending to NBFCs. RBI, which has failed to tackle the irregularities in the non-bank sector, is now claiming that “recent developments in the NBFC sector have brought the sector under greater market discipline.”
RBI is now planning to bring in the monitoring of NBFCs under its fold. What the RBI seems to neglect while claiming the reduction in NPAs is the impending increase in the NPAs of banks due to their exposure to the NBFCs.

Source: RBI's Financial Stability Report 

Second, while mentioning that the ‘NPA cycle is turning around’, the RBI has not said anything about the massive write-offs done by the banks in previous years. In response to an RTI filed by the “Indian Express”, RBI recently revealed that in the first three-quarters of FY18-19, the banks wrote off Rs 1,46,799 crore and in FY17-18, banks had written off Rs 1,61,328 crore. As per the reply, between April 2014 to December 2018, banks wrote off in Rs 5,55,603 crore.
It is important to note here that the recovery hasn’t crossed 15-20% of the total write-offs. The amount written off has been increasing year-on-year basis to clean the balance sheets, whereas there has not been enough done to recover the debt. The much-talked-about Insolvency and Bankruptcy Code (IBC) process has failed (barring a few cases) to recover the debts.
As a result of this, banks are taking haircuts well over 50%, sometimes even as high as 85%. Furthermore, the provision coverage ratio for scheduled commercial banks has been increased to 60.6 per cent in March 2019 from 48.3 per cent in March 2018. All these measures are not aimed to help the banks in the long run but to clean the books.
The Report, while portraying a positive picture of the financial system, mentions that the ‘idiosyncratic failure’ of the banks have lowered due to a better capitalised public sector banks. The problem with this perspective is that the RBI is yet to take responsibility for its policy decisions that have forced banks to lend recklessly.
Financial Accountability Network (FAN) India demands that RBI addresses the mammoth NPA crisis earnestly, take radical and bold steps for the recovery of outstanding bad loans and enforce a transparent due diligence process to ensure the NPA crisis is neither prolonged nor repeated. 

Further, RBI seems to be more interested in cleaning up the books by any means and aid the government’s plan of bank privatisation. FAN India demands accountability from RBI and banks for the write-offs and non-recovery of bad loans, since the small and large savings of common people is what is at stake.

Our demands:

• RBI must take radical and bold steps for the recovery of outstanding bad loans
• RBI must enforce a transparent due diligence process to ensure the NPA crisis is neither prolonged nor repeated. 
• RBI and banks must be accountable for the write-offs and non-recovery of bad loans.