'RBI must take the blame for India's banking mess'

'What was the RBI doing when infrastructure projects were stalled?'
'When the large corporates were taking loans, what was the RBI doing?'
'The entire system acted as cheerleaders for Vijay Mallya. The RBI failed, the banks failed, the auditors of the banks and Mallya failed.'

"Quick decision-making and quick administration, only, can change the situation the banks are facing today," says M R Venkatesh, a chartered accountant and commentator on domestic and international trade and economic affairs.

The author of 2 books -- Sense, Sensex and Sentiments and Dr Manmohan Singh - A decade of decay -- MRV, as he is popularly known, tells Shobha Warrier/Rediff.com how India's nationalised banks can be fixed.

Part I of our series on India's ailing PSU banks: 'Banking sector needs a T N Seshan'

It was reported that by June, 9 public sector banks would have gross bad loans below 5 per cent of their assets and 4 would have NPAs (non performing assets) in excess of 7 per cent.

Q3 results showed that most of the PSBs are in the red. Is it only because of the asset quality review ordered by the RBI? Or is it bad loans?

Bad loans are the legacy of the UPA (United Progressive Alliance). Since 2010, NPAs have been piling up.

Any particular reason for that?

In 2008, we had this great depression and since then the economy has not really taken off. Between 2008 and 2010, many people borrowed enormous amount of money and put in various infrastructure projects, hoping that the economy would grow at 10 to 12 per cent.

It actually grew at 5 per cent, which means many of them did not get enough money to even pay the interest.

This accumulation of NPAs assets has been happening since 2010. Everybody is in a suspended sense of disbelief now.

The books of the companies are not creatively managed, the banks are also accepting this accounting jugglery. Finally, the time has come for everyone to throw up their hands and say that the emperor has no clothes.

Now the issue of NPAs is not 5 per cent or 10 per cent -- it is much, much higher at 15 to 20 per cent.

Has the RBI's decision to review banks' asset quality forced them to declare NPAs?

Yes. It is not that the RBI came to know about it only in September 2015. The RBI is equally guilty and very much part of this whole mess, and cannot wash off its hands. The RBI should first answer why there were so much NPAs and why this belated recognition of it.

What was the RBI doing when the infrastructure projects were stalled?

Did the RBI warn the banks not to give loans again to these projects? No.

When the large corporates were taking loans, what was the RBI doing?

Why didn't the RBI ask the banks to book the NPAs all these years?

Everybody in the banking sector knew that the loans of (Vijay) Mallya were changed to equity, but what did the RBI do?

The RBI also has to be blamed for this kind of lending. Nobody in the RBI had the guts to stand up. Today when the water has risen above the nose, the RBI wants to make a virtue out of the necessity.

What should the RBI have done?

I will hold the RBI responsible because everybody knows infrastructure projects take 10 to 15 years to start reaping profits. You cannot have 90 days or 180 days cycle for them.

We don't have long-term funding for large projects like these. We still do not know how to handle them.

Our commercial banks are not equipped, they know only how to deal with car loans, house loans and education loans.

The core problem is the lending of the banks in the non-food sector doubled from somewhere between Rs 26 lakh crore and Rs 55 lakh crore between 2009 and 2014, but lending to large corporates tripled from Rs 7 lakh crore to Rs 21 lakh crore.

Of the incremental Rs 29 lakh crore between 2009 and 2014, 50 per cent has gone to large corporates. This is where crony capitalism came in. This is the period when people like Mallya got the loans. I am, of course, not saying everybody is a wilful defaulter.

The economy was badly managed by the UPA. When the government could not fund infrastructure or large projects, they had to rely on the private sector.

This also did not take off...

The economy did not take off, and as a result India Inc, too, did not get the expected returns. The situation spiralled and today it has gone out of control.

I am sorry to say that even the NDA (National Democratic Alliance) is not fully cognisant of the problem as they have not addressed several structural issues.

Like?

When this government came to power, there were stalled projects worth around Rs 8 lakh crore to Rs 9 lakh crore in the PPP mode (private public partnership).

Several of these had borrowed money from the banks and they were not able to pay back because the projects had not taken off.

And these projects could not take off because there was no clearance on land, environment, etc.

Who will you blame for India's economic mess?

If I have to put the blame on one person I will name Dr Manmohan Singh. I hold him responsible for the economic mess of this country today. Had he put his foot down on the 2G scam, people would not be scared to sign a contract with the government.

So many PSBs are in the red. How can they come out of the situation?

Quick decision-making and quick administration only can change the situation. This has nothing to do with banking.

You may know, 1 lakh crore road projects were de-bottlenecked by this government and only this type of decisions can change the situation.

Also, some of these companies have over-leveraged which means they have to sell their assets and repay the loans. Some require rescheduling.

Not just Mallya, there are around 4,500 wilful defaulters in this country owing over Rs 65,000 crore.

It will require 20 years to do so unless we have another quick mechanism.

When they go to court, it will take years for the bank to get the money back...

I would say if there is prima facie evidence against a wilful defaulter, his assets should be attached by the government.

A special tribunal should be formed and only if it is proved that he is not a wilful defaulter, his assets should be released.

Is it not lack of political will that created people like Vijay Mallya?

The entire system acted as cheerleaders for Vijay Mallya. The RBI failed, the banks failed, the auditors of the banks and Mallya failed.

What did the auditors of the State Bank of India do when the loans were converted into equity at a premium?

In fact, every department in India failed. He owes hundreds of crores to the income tax department, while for small amounts of money, ordinary people get harassed by the IT department. In fact, they are harassing the employees of Kingfisher now.

It means that the system gyrates to the rich and the famous. Why blame the politicians alone when it is an all round systemic failure?

For how long can the government pump capital into the banks that are in the red?

This cannot go on and this should not go on. Now, the government has reduced PPF (Public Provident Fund) rates, the banks too will reduce rates. But they cannot reduce the lending rate as it is still risky and the main reason is inefficiency. I am not bothered whether the SBI is owned by the government or the public.

The question is how to make banks more efficient. For that, you need professionalism and accountability. Today, bank appointees are not professionals and they are not doing their jobs properly. And there is no accountability.

Unless you bring in professionalism and accountability, no amount of money will make the banks banks healthier.

Today's NPAs are around Rs 10 lakh crore, and Rs 4 lakh crore are because of large corporates.

The RBI requires as much overhaul as banks. There is a huge gap between the expectation of the regulator of the bank and the RBI.

Failure of the banks is the failure of the RBI. What did they do in the last few years?

The time has come to critically question the RBI. If we do not, we will have another set of NPAs after 5 years.

So the banking sector needs a thorough overhaul?

Yes. We are still applying Iodex for cancer.

Does the sector need surgery?

Surgery is absolutely essential. It is better to do painful surgery now and remove the cancer forever. And the surgery has to happen first with the RBI and not the banks.

The banks are killing small and medium enterprises and strangulating the growth engines of the economy while greasing the palms of the large corporates.

Does the cure lie in privatising or downsizing the banks?

In this country, whenever there is a problem, there are three solutions -- liberalisation, privatisation and globalisation. No, they are not. The real solution is in bringing in professionalism.

In what way will it affect the common man?

If things go bad from here, the rupee may depreciate and people may lose money which is not good news for the government.

Unless the prime minister himself brings in professionals from various fields to nurture the banks, they will not come back to health.

Is this a very grave situation?

I would not say it is very grave, but it is a difficult situation, and it does not augur well for a country that does not have very big capital.

Illustration: Uttam Ghosh/Rediff.com
M R Venkatesh's photograph: Sreeram Selvaraj