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Rs 1 lakh crore of your money: What have banks done with it?

Dna exposes one of the best-kept secrets of the India banking industry. Banks cleaning up balance sheets by selling bad loans to ARCs, or writing them off

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Bank funds of about Rs 1 lakh crore are caught up in frauds or under investigation by the Central Bureau of Investigation (CBI).

But banks are greening their books by selling off bad loans to asset reconstruction companies (ARCs) or by restructuring payments (where the tenure of loan is altered when there is a repayment issue) or plain writing it off to make their balance-sheets rosier.

As on June 30, about Rs 2.54 lakh crore of bank loans turned into bad loans after borrowers defaulted on repayments. Add another Rs 4.46 lakh crore of restructured assets and you have around Rs 7 lakh crore out of the Rs 61.98 lakh crore of bank loans (read depositors' money) that are under stress.

Frauds and vigilance investigations have become commonplace. Depositors' money is getting wasted on operationalising promoters' business plans that are being drawn up to swindle money from banks. Most frauds are staged by dubious businessmen, who are hand-in-glove with corrupt bankers.

Which are the notable frauds reported recently?
Banks are closely monitoring the Bhushan Steel case (Rs 40,000 crore) while the account has still not turned bad. Kingfisher (Rs 4,022 crore), Deccan Chronicle (Rs 4,000 crore), Zoom Developers (Rs 2,400 crore). Winsome Diamonds (Rs 6,581 crore) and First Leasing Financial (Rs 1,000 crore) are some of the other big cases.

Aren't banks punished?
The RBI recently carried out an independent scrutiny of the loan and current accounts of Deccan Chronicle Holdings and slapped a combined monetary penalty of Rs 1.5 crore on 12 banks for violation of various rules. They were five public sector and seven private banks. While the maximum penalty of Rs 40 lakh was imposed on ICICI Bank, others penalised include Andhra Bank, Axis Bank, Canara Bank, Corporation Bank, HDFC Bank, IDBI Bank, IndusInd Bank, Kotak Mahindra, Ratnakar Bank, State Bank of Hyderabad and Yes Bank.

How do banks report drop in bad loans?
Despite an increase in frauds, many big banks like SBI and ICICI Bank have reported lower bad loans in the first quarter of 2014-15. Banks have sold bad loans of close to Rs 30,000 crore to ARCs till the end of the first quarter ended June 30, 2014. Banks have started selling off loans that are just 60 days due for repayment to avoid an NPA tag on their balance-sheets.

What do ARCs do?
Asset reconstruction companies (ARCs) specialise in recovery of loans or reviving the fortunes of stressed companies. Banks like SBI, ICICI Bank and IDBI Bank together have set up an ARC --ARCIL. There are private ARCs owned by Edelweiss and JM Financial.

How do banks sell bad loans?
Banks often sell the loans at a discount of 20-40%. ARCs pay 15% of the bad loans in cash and the remaining as security receipts, to be encashed over 8 years. All public sector banks sell loans through an auction process. Private sector banks sell them through bilateral deals.

What is RBI doing about it?
RBI said in its annual report released on Thursday. The increase in the level of restructured standard advances since 2012-13 reflects potential hidden stress in the quality of loan assets. The improvement in NPAs during Q4 of 2013-14 needs to be cautiously examined in the face of the increased of?oad of loans to ARCs by banks.

Is it planning any concrete action?
The RBI is proposing to cut down bank exposure to companies by half, so that funding to companies is drastically brought down. Tightening norms will help banks in risk mitigation during cyclical downturns.

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