The standard human response to any adversity is often
to turn around and take it out on someone smaller and
less powerful. We see this regularly in our quotidian
existence, but it is still a bit of a surprise to see
it happen at an institutional level, elevated to the
status of a policy.
Yet
that is what is happening with some of our public sector
banks, as they attempt to control the volume of unpaid
loans that they still hold on their books. Instead of
going after the large defaulters, most of which are
mega-corporate bodies that are well able to repay, they
have chosen to turn the screws (indirectly) on small
borrowers.
Non-performing assets (that is, those loans that are
doubtful or unlikely to be repaid) have long been a
major bugbear of commercial banks. This is for obvious
reasons, of course: lack of repayment or eventual default
is the ultimate concern of a bank, because it will simply
not survive if this exceeds a particular level. So NPAs
- or, more simply put - bad loans - do more than add
to the losses of a bank; they also threaten their survival.
But in that sense the Indian banking system is rather
healthy at the moment, at least by international standards.
The ratio of NPAs to total assets has been falling steadily
for more than a decade, from 14.6 per cent at the end
of March 2009 to only 2.4 per cent at the end of March
2010. This is a very healthy ratio indeed compared to
ratios in excess of 10 per cent in many developed industrial
countries, and much higher in several developing countries.
Even so, because of the legacy of the past, most commercial
banks in India, and especially the public sector banks,
still have very large portfolios of bad loans. Some
estimates place the total amount at more than Rs 200,000
crores. Recovering even some of this should enable banks
to be much more generous in lending to sectors and potential
borrowers that are currently starved of institutional
credit.
In fact, it should not even be that difficult, in purely
logistical terms. It is an open secret that most of
the NPAs are loans made to large corporate houses. The
top 200 companies account for anywhere up to 80 per
cent of the value of the total bad loans. So there are
relatively few debtors who hold a fairly large chunk
of the bad debt. This ought to make it quite simple
to go after those who have not repaid their previous
loans, especially if they are currently making profits
that have made their top shareholders count among the
richest men in the world.
But this has not been on the cards for a while, if ever.
The huge accumulation of bad loans made to large corporates
continues unabated, while the same corporates merrily
continue to access credit usually on highly favourable
terms both in India and abroad. Instead of focussing
attention on redeeming some of that debt, or even of
naming and shaming the defaulter, the commercial banks
are seeking ways to restructure their portfolio in ways
that put all the burden on small borrowers.
Thus, the phenomenon of banks hiring ''collection agents''
to recover small loans and credit card payments had
already started. These agents are usually little more
than goons who use threats and sometime even physical
force to ensure repayment or to take over collateral.
But of course such actions are cumbersome, and they
also tend to give the banks concerned a bad name. So
the more recent tendency is to outsource such activity
altogether, by selling off such assets to other ''finance''
companies that will have less compunction in ensuring
repayment by all possible means.
Thus, there have been reports that several public sector
banks have been selling off their small NPA accounts
(for those loans of Rs 10 lakhs or less) at a large
discount, to private players. Note that there is no
question of doing so with the loan accounts of those
who have borrowed more, presumably because they would
have greater economic (and political?) power to counter
the repayment pressures.
The companies that have bought these greatly discounted
assets will therefore move quickly to ensure that their
investment was worth it, by extracting as much of the
loans as they possibly can. And they will use not just
correct formal procedures, but also goons and toughs
to scare the borrowers into repaying.
This means that the small scale producers, the middle
class families and similar groups that have borrowed
relatively small amounts will all be under great pressure
to repay promptly. They could have borrowed these amounts
to finance their production, to eke out a livelihood,
to purchase some treasured asset like a consumer durable
or a means of transport, or been to finance education
or health expenses. It does not matter what the cause
is, if for any reason they experience difficulties in
timely and continuing repayment. They can expect humiliating
treatment from aggressive debt collectors, attachment
of property and intimidation by various means, even
up to threat of physical violence.
Since these small loans account for relatively little
of the total NPAs, such sale of NPAs will do very little
to improve the overall asset position of the banks.
And of course the big fish that do account for most
of the NPAs will simply swim away unmolested, and even
continue to get more loans from the same banks!
Because such a move gets couched in technical language
in banking reports and is scarcely mentioned in mainstream
media, most people are not even aware of the implications
of such a seemingly innocuous move of the public sector
banks. Only when the instance of harassment and eviction,
and the midnight knocks on the door by mafia-style collectors,
start to proliferate, will the full implications sink
in.
Would it be too much to ask for a level playing field
in the matter of these NPAs? That for every small farmer
or middle class household that is harassed, one big
company is also exposed and forced to repay?
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