The Hindu : Karnataka News : Corporates, not farmers, are big defaulters business sense

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Karnataka

Corporates, not farmers, are big defaulters business sense

Bankers are saying little about wilful defaulters of the corporate sector

When banks are asked to waive farmers’ loans it is often greeted with derision. Soon after the announcement in the last Union Budget, there was talk that the waiver would sink the banks. Farmers, it was said, will make a habit of not returning the money they borrow.

Lost in this sudden rush of concern for the banks was a simple fact: that a little over 2,300 borrowers from banks are actually ‘wilful’ defaulters, owing Indian banks a little over Rs. 20,000 crore. By contrast, the recently-concluded farm loan waiver scheme, which benefited lakhs of farmers, cost Rs. 60,000 crore.

This unwillingness to place figures in an appropriate context is not mere carelessness; it reveals a mindset that adopts different standards for the weak and the strong.

Bad loans

Bankers say borrowers who are unable to cope with economic fluctuations are in some sense a smaller problem in the bad loans business. More serious is the problem posed by ‘wilful’ defaulters.

According to the Reserve bank of India (RBI), non-performing assets (NPA) of the 27 public sector banks (PSB) amounted to Rs. 39,000 crore as on March 31, 2008.

The extent of the problem is highlighted by the fact that the “provisions” these banks made in their books – write-offs – amounted to half of their operating profits. In other words, if they did not have to make the “provisions” they made last year, net profits would been twice what they were.

But this is only one aspect of the problem. Not all borrowers intend to run away with the money. Sometimes, they may be hit by a crisis that is caused by factors beyond their control.

In fact, many small enterprises are unable to repay because the economic regime has become decidedly unfriendly since economic reforms unfolded. So, how does one spot a victim from a borrower who does so with the intention of not repaying the loan?

Wilful defaulters

The RBI defines a ‘wilful’ defaulter as one who defaults “even when he has the capacity to honour obligations.” It adds that a wilful defaulter is one who has not utilised the loan for the purpose it was drawn to finance – in effect, implying a diversion of funds.

Wilful default can also arise when the borrower “siphons off funds” so that it is used for purposes other than for which the loan was drawn.

It is surprising that bankers say so little about the money that is owed to them, especially by borrowers who never intended to repay their loans. In fact, bankers, in private, affirm that the “big fish”, rather than small borrowers (such as farmers), constitute the crux of the problem.

Corporates

Given that neither the bankers nor the Government, which owns a considerable part of the banking sector in India, have been shy about raising the issue, it has been the unions which have highlighted the issue repeatedly.

The All India Bank Employees’ Association (AIBEA) has released a list of ‘wilful’ defaulters in the country, presented State-wise and bank-wise. The list is shocking, to put it mildly.

As on September 2007, loans of Rs. 20,140 crore have not been paid by 2,369 borrowers, according to figures released by the AIBEA recently. The top 10 defaulters accounted for a little less than one-tenth of all wilful defaults of bank loans.

Although the average size of borrowing by a wilful defaulter is only about Rs. 8 crore, it hides the concentration of such loans among particularly large borrowers, especially large industrial houses.

A single corporate entity often disguises the true extent of its liabilities by borrowing from multiple banks. For instance, the BPL Group, a prominent corporate entity in Bangalore, has borrowed almost Rs. 94 crore from five banks.

This group’s defaults constitute one-fifth of all wilful defaults in Karnataka.

This highlights the fact that the problem of ‘wilful’ default is essentially a problem of large corporate borrowers rather than small borrowers.

V. SRIDHAR

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