DEFAULTING BORROWERS AND BANKS’ DILEMMA – BY Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

November 27, 2014 | Posted by bobbysrinivasan << back to blog

Bad loans in banks have emerged as a systemic problem in the Indian banking scenario. A significant amount of money in circulation has disappeared because some of the borrowers for what ever reasons have decided not to return the loan with interest to the bank. This is one of the reasons for slowing credit flows into the infrastructure projects. It is estimated that nearly Rs.6 lakh crores ($97 billion) or one tenth of the total loans are stressed assets and restructured loans. This is equivalent to 10% of all the bank loans.

Indian economy is currently loaded with stalled projects. Currently 613 of them, namely the government projects are stalled having spent Rs.5.8 trillion. It is estimated that they will require another Rs.6 trillion to complete them. Now banks which carry huge bad loans are in no position to provide funds for these projects. To make matters complex, starting April 1, 2015, the new banking rules will come into effect by which the category of restructures loans will be abolished. The outstanding amounts there in will be moved to non-performing loans.

Dr. Rajan has pointed out that the level of banking stress in the world has increased because of failure to recognize and flag the problem loans quickly and then to deal with them, Dr. Rajan has clearly pointed out as to how some of the corporations and entities are freeloaders who make the credit profiles of banks unhealthy. Here are some of what he said:

“It was the tax payers and honest borrowers who end up paying the price for the losses suffered by state run banks due to bad loans given to a few big borrowers.”

“Regulatory forbearers, which are a euphemism for regulators collaborating with banks to hide problems and push them into future is a bad idea.”

“A large borrower whose loan has turned bad should not be lionized as a caption of industry but justly chastised as a free loader on the hardworking people of this country.”

“honest borrowers and tax payers are ending up paying the price due to the excessed committed by large borrowers by way of losses to state-run banks and high pricing of loans.”

The fund, promoters put into a company are basically classified as super equity which retains all the upside in good times and very little of the downside in bad times.”

Reading these quotes, which is completely truthful about the current banking practices, one needs to ask the following questions to the banking authorities:

Why punish me, a small time depositor (borrower) with low (high) interest rates for deposits (loans) so that you could write off bad loans?
Did you collude with this big time thieves and plunderers in order for them to gain at the cost of small time investors like me?
Are you going to ask the federal government for more equity funds for banks for its continued survival? If so, how much of tax payers’ money?
To meet the Basel III requirement, you already need thousands of crores of equity. These write off of bad loans will only add up to the total borrowing. From where and how are you going to get the funds?

Prime Minister calls for more governance (not government) and transparency. Will these banks come out and tell the truth before it is too late?

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