Lack of Reporting mechanism for Credit extensions to defaulters
By: Amit Bhushan Date: 5th Oct.2016
Centre softens on bad loans, asks PSBs to handhold top borrowers
http://economictimes.indiatimes.com/articleshow/54685555.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
The ever-greening of bad credit seems to back with a bang. And nearly all leaders and parties barring the Communist have ensured that all energies remain focused away from such domestic issues. The parties have been unable to even demand that that fresh credit extension to defaulting borrowers be made public for the purpose of record only. This so because then the public and media would have a follow-up later, if there are cases of further defaults and repealing of credit to the same borrowers. Needless to say that such a scrutiny would be good for the Public sector banks as it would serve as some sort of a filter on how much to lend and on what terms. It would also ensure much greater pressure on the borrowers to make good the past defaulted amount and ensure viable projects only getting finance because of public scrutiny.
Regards any banking action on account of default, well a restructuring would have already ensured current repayment ability basis new terms and so it should not matter unless there is an intention to default again or a bad forecasting (and such risks may be highlighted in disclosures). It may be noted that the disclosure is being asked only about the fresh loans or restructuring of past loan being offered to those borrowers which do not have a healthy track record for past loans by banks towards any of the projects and this declaration should be post restructuring or loan deal, stating the quantum of entire banking debt with such borrowers. Not having such a window has been a cause of worry whereby bankers face a ‘moral hazard’ problem since loans to such borrowers would be ever-greened. Then it translates into ‘adverse selection’ for projects being financed as due-diligence becomes lax. The result is the banking mess and the borrowers’ continuity to exercise political clout by funding ‘all’ sort of parties and netas who can ensure the continued recycling of these loans.
The political parties of course get to make bogus promises, instead of ensuring improved productivity and value to public. Take the case agri-industry. The focus on cotton has ensured move to water-rich crops and due to inputs other than ‘credit backed seeds and fertilizers’ being in short supply (i.e. land and water), farmers face persistent issues with resultant suicides. The politicians get to ‘fight’ for the farmer’s cause by demanding more subsidy of fertilizers that goes to fertilizer companies, cheaper seeds by transferring subsidy to seed companies and irrigation projects by diverting public money to such projects which get silted within an year or two with ongoing irrigation works whose efficacy is well-known to farmers. The efficiency of Indian cotton mills and job creation on this count is also known including the investment subsidy and loan ever-greening for the sector is advertised to government to attract investments, thus known. However instead of taking upon this dependency, our politicians of all hues and colours have ensured that such a ‘virtuous cycle’ that pulls them votes continue unabated. The election pressure actually ensures that politican’s need for money to canvass votes goes up and so are the promises of debt waivers and subsidies to ‘masses’. The case of other sectors may not be much different.
We do not have any political party or leader proposing any mechanism that would bring to halt such ever-greening. Only recycling of loans is being argued for by citing ‘tough economic environment’. If the environment is tough then it is tough for ordinary public as well rather than the businesses alone and this seems unanswered.
By: Amit Bhushan Date: 5th Oct.2016
Centre softens on bad loans, asks PSBs to handhold top borrowers
http://economictimes.indiatimes.com/articleshow/54685555.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
The ever-greening of bad credit seems to back with a bang. And nearly all leaders and parties barring the Communist have ensured that all energies remain focused away from such domestic issues. The parties have been unable to even demand that that fresh credit extension to defaulting borrowers be made public for the purpose of record only. This so because then the public and media would have a follow-up later, if there are cases of further defaults and repealing of credit to the same borrowers. Needless to say that such a scrutiny would be good for the Public sector banks as it would serve as some sort of a filter on how much to lend and on what terms. It would also ensure much greater pressure on the borrowers to make good the past defaulted amount and ensure viable projects only getting finance because of public scrutiny.
Regards any banking action on account of default, well a restructuring would have already ensured current repayment ability basis new terms and so it should not matter unless there is an intention to default again or a bad forecasting (and such risks may be highlighted in disclosures). It may be noted that the disclosure is being asked only about the fresh loans or restructuring of past loan being offered to those borrowers which do not have a healthy track record for past loans by banks towards any of the projects and this declaration should be post restructuring or loan deal, stating the quantum of entire banking debt with such borrowers. Not having such a window has been a cause of worry whereby bankers face a ‘moral hazard’ problem since loans to such borrowers would be ever-greened. Then it translates into ‘adverse selection’ for projects being financed as due-diligence becomes lax. The result is the banking mess and the borrowers’ continuity to exercise political clout by funding ‘all’ sort of parties and netas who can ensure the continued recycling of these loans.
The political parties of course get to make bogus promises, instead of ensuring improved productivity and value to public. Take the case agri-industry. The focus on cotton has ensured move to water-rich crops and due to inputs other than ‘credit backed seeds and fertilizers’ being in short supply (i.e. land and water), farmers face persistent issues with resultant suicides. The politicians get to ‘fight’ for the farmer’s cause by demanding more subsidy of fertilizers that goes to fertilizer companies, cheaper seeds by transferring subsidy to seed companies and irrigation projects by diverting public money to such projects which get silted within an year or two with ongoing irrigation works whose efficacy is well-known to farmers. The efficiency of Indian cotton mills and job creation on this count is also known including the investment subsidy and loan ever-greening for the sector is advertised to government to attract investments, thus known. However instead of taking upon this dependency, our politicians of all hues and colours have ensured that such a ‘virtuous cycle’ that pulls them votes continue unabated. The election pressure actually ensures that politican’s need for money to canvass votes goes up and so are the promises of debt waivers and subsidies to ‘masses’. The case of other sectors may not be much different.
We do not have any political party or leader proposing any mechanism that would bring to halt such ever-greening. Only recycling of loans is being argued for by citing ‘tough economic environment’. If the environment is tough then it is tough for ordinary public as well rather than the businesses alone and this seems unanswered.