The arrest of five officials of state-owned banks including the former chairman of IDBI Bank, Yogesh Agarwal, along with senior officials of Kingfisher Airlines for the “undue favour” shown to the grounded airline appears to be part of the government’s effort to bring to book several loan defaulters, whose failure or wilful act of not repaying their borrowings has hurt lenders. In its chargesheet filed in a Mumbai Special Court on Tuesday, the CBI has alleged that of the over Rs 900-crore loan disbursed to Kingfisher Airlines, over Rs 200 crore was diverted for personal use and that part of the loan was also routed to offshore accounts. It pinned the blame on the bank officials for sanctioning and disbursing the loan. Any move to punish those found guilty of wilfully causing losses to institutions which are custodians of public funds ought to be welcomed. But it remains to be seen whether the evidence is strong enough to prove the CBI’s charges of acts of omission and commission.
The message that goes out with the arrests may be a discomfiting one, at least from the perspective of bankers. It is lenders who are the easy targets given the inability of the government to punish promoters or top government functionaries in Delhi, who nudged these bankers to give loans to business groups in the high growth years. Such messaging poses great risk, especially since it comes at a time when loan growth is at a multi-decadal low: RBI data in December indicates demand contraction in many sectors, reflected also in unutilised capacities, and the fact that there are few greenfield projects seeking funds from banks. Compounding the problem is the level of bad loans. Non-Performing Assets of 42 banks had risen to 8.86 per cent of total advances at the end of September 2016 and is expected to swell in the wake of demonetisation. Reports indicate that local lenders will have to set aside more capital against more bad loans, given the impact of demonetisation on small firms and entrepreneurs. It also comes on top of a slowdown in the recovery of bad loans as bankers are caught up with work related to the note ban.
All these developments could mean higher NPAs at the end of this fiscal, a scenario far removed from the projections of last year when the central bank set a target of March 2017 for the banks to clean up their books.
However well intentioned, the inherent risk in the arrests on Monday is that bankers may turn more risk averse, which could weigh down state-owned banks at a time when they ought to be expanding their loan books. This government inherited a legacy of bad loans. However, much of the systemic changes that were promised, including ensuring board-driven banks and higher corporate governance standards, are yet to be implemented.
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