HDFC Bank chairman Deepak Parekh struck a chord when he declared over the weekend:
• It seems brutally unfair that we have allowed a system of loan waivers and write-offs every now and then, but yet we do not have a robust enough financial system to protect the honest common man’s savings.
• There is no system in place to safeguard the hard-earned savings of the common man…there is nothing to stop misuse of savings…
While Parekh, who did not name any bank, may have had the Punjab and Maharashtra Cooperative Bank (PMC Bank) in mind, the damning admission from one of the country’s top bankers did little to boost confidence in the system.
After all, three depositors of the PMC bank lost their lives after the Reserve Bank of India (RBI) restricted withdrawals to first Rs 10,000 in six months and thereafter Rs 40,000 in six months from the bank. This was of no consolation to people who had deposited their life’s savings, in one case Rs 90 lakh, in the bank or those who needed to withdraw much higher amounts for medical or other emergencies. Financial and banking experts questioned the wisdom of keeping all one’s savings in cooperative banks which they felt were dubious. But how is the common man to know which bank is weak or dubious? And why did the regulators fail to detect it on time?
What is more, if the government can spend taxpayers’ money to bail out companies, banks and farmers, why can’t it bail out depositors? It is now known that only up to one lakh Rupees per bank account is secured by sovereign guarantee by the government and nothing beyond that. Is the solution for someone with Rs 50 lakh of savings to open 50 accounts of Rs one lakh each to ensure that he doesn’t lose his money?
The Times of India published a chart to show that even this ‘insurance’ of up to one lakh of Rupees in India is the lowest in the world (see chart). So, what should the depositors, already hurt by falling interest rates, do?
There were 1,551 urban cooperative banks (UCBs) and 96,612 rural co-operative banks (RCBs) in the country as of March 2019. Defaults by two housing finance companies, Dewan Housing Finance Corp and Altico Capital, have increased fears of the contagion spreading to the banking system.
There was a time 20 years back when the Union Finance Minister would talk about financial inclusion and how to make sure that banking reaches the poorest in the remotest parts of the country. PSU banks were often reprimanded for not reaching remote rural areas. The cooperatives that were the preserve of the state governments were given a free hand to outcompete the money lenders in the rural areas.
State level politicians even made sure that a network of cooperatives emerged in urban areas. In order to expand credit availability to the large middle class who did not have the credentials for borrowing, NBFCs were introduced in 1997 during the Vajpayee govt. This encouraged the middle class to take loans for house, car, two-wheelers, mobile phones and even home appliances.
The consumer boom was fuelled by NBFCs and the industrial infrastructure boom by Public Sector Banks and Private entities. When growth was nearly at 9% and the industrial production was booming, feeding the growing demography of India, banks, NBFCs, cooperative banks were all making money.
But in the last six years when growth is tapering off, banks, NBFCs and cooperatives are going bust. What is worst is that Debt Tribunals that are supposed to give speedy relief are not delivering.
The RBI was always in the know of the situation; but it was the errant industry, hands in glove with their political masters that wanted evergreening of their loans for failed and dubious projects. It was Raghuram Rajan as RBI Governor who first brought into the public domain the debate on why banks should not keep evergreening bad loans and instead clean up their balance sheet, try and recover bad loans and take industry to the cleaners.
Public sector banks were unwilling to call the loans bad but Rajan prevailed and made sure that bad loans are cleaned. This did not go down too well with the industry and the bureaucrats in the North Block and they made sure that Rajan was asked to leave.
The swadeshi brigade in the Modi govt cheered, justifying it by saying that there was no need for foreign trained RBI governors! But Governor Urjit Patel, who was appointed next, too had to agree with Rajan’s prescription of cleaning the banks and so was Modi-appointee Chief Economic Advisor Arvind Subramaniam. It comes as no surprise that all the men appointed by Modi govt had little choice but to agree with the state of affairs of the public banks. And finally, the IBC was brought in.
Much of the NPA mess of the public sector banks still remains discretionary and the Union Finance Ministry continues to interfere and determine which company should be declared insolvent.
In a recent missive, the FM stated that Small and Medium enterprises and Mudra loans should not be termed as NPAs. So, industry and favourites of this government remain above board.
There are many Gujarat-based companies that have huge debt and are not doing too well. But their loans till date have not been classified as NPAs. Recapitalising banks is the favoured way forward rather than take the risks of financial sector reforms which is the crying need of the hour.
The mess in the financial sector does not stop at the public sector banks; the rot is far deeper. The cooperative banks are owned by powerful political lobbies in each state. The collapse of PMC is just the tip of the iceberg.
The tales of cooperatives lending to sugar barons in states like Maharashtra, Karnataka, and Andhra Pradesh are well known. Most of the cooperative banks are owned by the rich and powerful political leaders of the state and these extend loan to sugar cooperatives that are also owned by their own families. After a few seasons when the sugar cycle is down, these loans are defaulted and the state govt makes sure that it gets recapitalised again to keep the banks going.
At the moment the crisis of PMC Bank in Maharashtra is a story of an urban cooperative banks lending to a business entity that was in the real estate business. When the going was good the money borrowed was diverted to various other entities, via backdoor, including a port owned in Vijaydurg, by BJP MP Rajeev Chandrashekhar.
Today when the real estate business has crashed and HDIL stopped repaying the loans, PMC is in trouble. This raise doubts about the financial health of all the other cooperative banks across the country.
It should not come as a surprise in coming days that cooperative lending to the MSMEs and the much talked about Mudra loans will also turn sour. There will be many more cooperative banks that will turn belly up in the coming days.
The Modi government since 2014 has not come up with a single idea that can fuel growth. Instead it is more interested in political witch hunt and now that is spilling on to the industry. Tax terrorism is also a tool used extensively even though the PM himself says that it should not be used.
Given such an atmosphere of naming and shaming and calling people crooks, which businessman would like to make new investment? The banks, even if they have been recapitalised twice have no borrowers.