Non performing assets of Banks too high for comfort. Who’s to blame?

Thanks to India’s mining sector companies whose projects are stalled or faltering, total bad loans, called non-performing assets, of listed banks had reached a staggering Rs.4.85 lakh cr. With bad loans piling up in Indian Banks, the blame is on lax regulation at both the clearance level and the credit giving agency level.

As per a news report by The Times of India, the Centre for Science & Environment (CSE) has confirmed between 2007 and 2014 "almost all environmental clearance applications were cleared" while "94 percent of proposals seeking forest clearance were approved, yet the lax regulation at both the clearance level and the credit level prevented the smooth flow.
Infrastructure, iron and steel, mining, textiles and aviation had 52% of total stressed advances (NPAs and restructured loans) of all scheduled banks, according to Reserve Bank's Fiscal Stability Report of December 2014. Within infrastructure, electricity, oil and gas constituted around 58%, transport 21% and telecommunications around 10%.

India's regulatory framework for natural resources - minerals, land, forests and environment - is "unpredictable, arbitrary and irrational" the RRI report says. Projects are sanctioned on a case to case basis without reference to the larger picture, final decisions are in the hands of a small group of bureaucrats, there is no transparency and accountability, regulators have little access to objective information and the impact on people is very cursorily assessed.

In a similar analysis of the financial regulatory system, the RRI report says that the RBI does not regulate due diligence by banks beyond forbidding loans purely for land acquisition. There is no explicit requirement from SEBI to disclose regulatory compliance or the status of clearances, the report says.

A senior officer of a major public sector bank told TOI on condition of anonymity that although theoretically everything should be final before the loan disbursement starts, in practice, initial disbursement starts even as the regulatory approvals or land acquisition process is continuing. "This happens because the promoters usually convince the lead bank at the highest level that everything is on course," he said.

The consequences of this lending spree are cronyism, fixing and regulatory arbitrage, the RRI report says. A CAG audit of land acquisition in Odisha found that the State Industrial Development Corporation illegally permitted companies to mortgage 46,533 acres of publicly acquired land. It was found that out of 89 memoranda of understanding signed by the State government only two had started production. A similar audit in Rajasthan had found that only 30% of over 72,000 acres land that was acquired was actually being used. Another audit of SEZs revealed that 11 developers in four states had raised Rs.63 lakh cr by mortgaging their SEZ lands, 35 percent of which was diverted to non-SEZ purposes. In Chhattisgarh, an ET report had revealed that just 15 out of 60 private power projects were ever going to start. Most companies were looking for buyers of land.

(Image: Reuters)