Banking NPA or non performing assets and PNB Scam.

Unrecoverable loans of public sector banks.

Non Performing Asset or NPA is a euphemism for ‘bad or unrecoverable loans’ in India. It is similar to sub-prime loan crises in USA in 2008 but there is a huge difference. NPA in India consist of Commercial loans given to large businessmen. NPA has little or no component of personal or housing loans. NPA also has another feature that it is mostly secured with collateral but due careful crafting the collateral is grossly inadequate. A large number of these borrowers have also been or soon would be declared willful defaulters and they will be placed on blacklist for future loans.

Recently it surfaced that few swindlers were able to take Letter of Credits without collaterals as well. This is called Punjab National Bank scam performed by a person named Nirav Modi and his uncle Mehul Choksi. These people anticipated problems and simply vanished.  Another scamester who allegedly misappropriated loan money is Vikram Kothari. He is in custody. There are about 9300 odd such wishful defaulters.

Unfortunate and sad part of NPA saga is that it happens every two decades. Banks were nationalized in late 60’s due to similar problems. Last such problem was in 90’s. Several banks whose capital was wiped out were merged with larger banks besides infusion of more funds. It is all over Déjà Vu in 2014-2018.

So what caused this mammoth blunder?

Actually many things. From corruption to bad policy decisions, bad economics and administrative/legal errors. Lack of respect for legal advice is the most apparent reason. Banks prefer convenient lawyers over efficient ones. They don’t like if too many probe is made by a lawyer while doing due diligence. This fact is being stated out of personal experience of a few years with a law firm that was working with banking sector.

Another stupid reason is that the banks think that if it is a big loan for a big project, it will not fall apart. This presumption is fallacious and history has proved it to be incorrect, many times over.

Investment banking.

Investment banking is dead in India.Investment banks are supposed to nurture big and long term projects. They have to study the projects and its viability and only there after invest in the projects. But they do, neither. Infact they have no means to do it.

All the Government owned investment Banks are dead. ICICI Bank which is now in retail banking was an Investment Bank. When most of its capital was about to be wiped out, it was given retail banking licence. Similar is the case of IDBI bank and IDFC. It is in bad shape and soon it will also be permitted retail banking to clean up bad loans by retail banking profits.

The truth is, India is best place for retail consumer loans like personal loans,  housing or car loans etc. The default is less than 2%.

Retail banks doing business of Investment Banks

Public sector banks are retail banks. They are supposed to give loans to ordinary citizens and middle class businesses called SME or small and medium businesses. Why they traveled into investment banking?

This major policy shift happened right under the watchful eyes of Reserve Bank, Finance Ministry and Government of India. The result we are facing today was written the day Retail Bankers traveled beyond there territory.

It is high time that a cooncisous policy decision is taken in this regard and the distinction between retail banks and investment banks is clearly articulated with set boundaries to avoid similar failures. As regards the deaulters, they must be prosecuted for cooking th books which is rampant in India.

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