New RBI data shows wilful defaulters are laughing all the way away from banks
The saying goes if you owe the bank $100 that is your problem; if you owe the bank $100 million, that's the bank's problem.
Banks put all their might to get the money back from retail borrowers if they default on a car or an auto loan. Delay one instalment and banks come knocking on the door. They even resort to naming and shaming tactics, using third parties. The tactics seem to work in most cases and the borrower pays back.
But it is an entirely different game when it comes to corporate loan default, which is at a much bigger scale. Banks seem to forget their drill when faced with powerful defaulters, who have a battery of lawyers which drag the lenders from court to court for years on end. And in the end, banks have little to show by way of recovery.
The numbers game...Ugly numbers are already popping up. The Reserve Bank of India data, shared with Parliament, on December 19 shows that the country’s top 50 "wilful defaulters" owed Rs 92,570 crore to Indian banks as of March 31, 2022.
Wilful defaulters are those borrowers who have the means to pay back the banks but wouldn't do so. Banks ostracise such defaulters from the financial system. Gitanjali Gems, promoted by fugitive economic offender Mehul Choksi, tops the list with Rs 7,848 crore, followed by Era Infra, an exposure of Rs 5,879 crore and Rei Agro which has defaulted on loans worth Rs 4,803 crore.
Choksi, said to be an Antiguan citizen now, is beyond the reach of Indian law. The government and its several law enforcement agencies have, so far, failed to lay hands on any of the high-profile bank defaulters, which include former liquor baron Vijay Mallya, Winsome Diamonds & Jewellery promoter Jatin Mehta and Choksi’s nephew Nirav Modi, who is fighting his extradition from the UK.
But it’s not just about wilful defaults. Much of the Rs 10 lakh crore loan that banks wrote off in the last five financial years belongs to corporates.
Of the total loan write-off, banks could recover only a fraction—around Rs one lakh crore. The remaining Rs 9 lakh crore is as good as gone, though technically the process of recovery is always on.
It’s our money
Every rupee that a bank writes off has to be provided for—called provisioning in the bankspeak.
Banks' profitability thus takes a hit. Who are the real losers? Common shareholders and depositors. Banks are supposed to be the guardians of public money. They raise deposits from small and big depositors and use these to lend to businesses.
So whenever a loan is not repaid, it’s the shareholder of the banks (value erosion) and the depositors (as the bank turns weaker in terms of capital and profitability) who suffer.
The government has, time and again, reiterated its intent to clamp down on wilful defaulters.
Coordinated action by the government, RBI and other sector regulators is critical to tackling wilful defaulters as seen in the Kingfisher case.
Banks are sitting ducks for cronies and crooks. In most cases, banks haven’t made meaningful progress in the recovery from deep-pocketed and well-connected promoters. At the end of a long legal process, the value of underlying assets deteriorates and banks are left empty-handed.
The government’s intervention to speed up the recovery process is equally critical since each penny it feeds to state-run banks from the exchequer is public money.
A lot of ground needs to be covered and quickly, as the loan write-off and wilful defaulter numbers show. Do the government and the RBI have the will to clamp down on wilful defaulters?
(extracts of newspapers)
Birla WP Management Co.
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