Bad Debts and PSU Banks

The public sector banks are smashing all doom predictions and leaping forward. Despite the revenue addition and steady growth there are several loopholes. One of the grave gap is that bad debts which are mostly forced by rich, mighty and powerful. Day in and day out politicos and burst out business people bee line PSU banks for loans. Knowing fully well that they cannot repay the loan banks are forced to give them the required amount due to political pressures. I am remember the strict saying of a bank manager in Salem to an educational loan request. The boy who applied for the loan belonged to poor economic background. He got 1095 marks out of 1200 in HSLC exam. His parents are long standing small customers in the bank. They make potato chips and live hand to mouth existence. When I pointed out to the manager that he is duty bound to give educational loan to this poor boy, his prompt arrogant reply was “how can this potato maker repay Rs.70,000/- loan? I told him that the finance minister told the Lok Sabha “educational loans must be disbursed without collateral security for high scorers from the weak economic background. He shot at me “oh! finance ministers keep coming and going. Will they rescue if these people don’t repay”. Those strictness apart PSU banks have return off a whopping Rs.25,000 crores last years as bad debts.

Times of India writes on 2 December 2009

When everyone was raising a toast to the success of government-nurtured public sector banks (PSBs) for their canny business sense and for having posted robust growth backed by huge profits in the downturn, these desi financial institutions quietly wrote off bad debts running into thousands of crores in each financial year just to give their bottomlines a clean look.

According to statistics submitted by the finance ministry before Parliament on Friday, the government banks together in the last three years, since 2007, have written off nearly Rs 25,000 crore.

The figures are alarming when compared against the net recovery of these government entities and the fact that a part of these write-offs included one-time settlements (OTS) that the banks entered with its defaulters by agreeing to take a token amount against their outstandings and close the case.

This OTS scheme of banks had led to the fall of many criminal cases being prosecuted by the CBI in various courts, leading to the intervention of the Supreme Court last year. In many such cases the investigative agency had enough evidence of a collusion of bank officials with the “willful” defaulters.

According to government data, in 2007, against a recovery of Rs 9,200 crore, these PSBs had written off more than Rs 9,400 crore. The story was repeated in 2008 when against a recovery of Rs 9,300 crore these banks had written off Rs 8,000 crore. The net recovery in 2009 was about Rs 11,000 crore while write-offs exceeded Rs 7,400 crore.

The government’s claim that it has managed to bring down NPAs from 18% in 1997 to 2% at the end of March 2009 sounds hollow and highlights an alarming trend of “cooking” books to present a healthy status. Though in the previous year, a portion of write-offs also included agricultural loans, the net NPAs of these PSBs at Rs 44,000 crore at the end of last fiscal against an outstanding of Rs 21 lakh crore is likely to see a surge given these banks exposure to commercial real estate.

Total outstanding credit to the commercial real estate of Indian banks, both government-owned and private, at the end of March 2009 was Rs 91,500 crore as against Rs 63,000 crore till March 2008.

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