Whose Money Is It Anyway?

The Supreme Court’s (SC) observation that names of bank-loan defaulters be made public and Mint Road’s response that doing so will affect the economy will be a turning point in the on-going discourse on non-performing assets.

A bench led by Chief Justice T S Thakur told the Reserve Bank of India (RBI) that the amount of bad loans disclosed in the regulator’s affidavit makes it clear that the “outstanding is very large” and that the court would need to know about the steps being taken to retrieve the money.

“Are you not supposed to keep vigil? Is RBI not supposed to maintain information and act on how public sector banks are advancing loans? These banks are supposed to act prudentially but if they have been doing it by flouting norms and without ensuring adequate assets as securities, are you not supposed to take actions against them? RBI is the regulator… you must act as a watchdog,” the bench told RBI’s counsel Jaideep Gupta.

The issues on hand
Last fortnight, RBI governor Raghuram Rajan, held "If someone defaults on their credit-card bill, would they like it if their names were made public?”. Banking Secrecy laws under the RBI Act (1934) debars lenders from giving out information on borrowers except to the central bank and too under a prescribed format. Gupta again reiterated the same when he mentioned that both the RBI Act and the Credit Information Companies (Regulation) Act (2005) states details of defaulters be kept secret.

While there are merits on either side of the debate, it must be borne in mind that the strictly legal stand taken by Mint Road may not be in sync with the times we live in, especially given the widespread public outcry over dud-loans; that some make merry while others are hauled up by banks over the coals form sums much smaller. Yet another point is that unlike other businesses, banking involves a much higher level of public engagement given that depositor’s monies are involved – the banking business is highly leveraged.

As Uday Kotak executive vice-chairman and CEO of Kotak Mahindra Bank (KMB) told BW Businessworld in an interaction: “If you put in Rs 10 of equity and borrow Rs 100, you can lend out Rs 110. However, if just Rs 5 of loans out of the Rs 110 go bad, you lose 50 per cent of your equity, and it takes just Rs 10 of assets going bad to bankrupt you!”

In the US, you have the Prompt Corrective Action, a federal law that mandates progressive penalties against banks that exhibit progressively deteriorating capital ratios. Mint Road also has its own PCA in terms of three parameters -- capital to risk weighted assets ratio, net NPAs and Return on Assets for initiation of certain structured and discretionary actions in respect of banks hitting such trigger points.

After the blowout of the Vijay Mallya mess and attendant hue and cry over dud-loans, RBI initiated PCA measures against the Chennai-based Indian Overseas Bank (IOB). In a communique to the bourses, IOB said “the directions given by RBI are for improving the internal control of the bank and for the purpose of consolidation of the activities of the Bank”, but did not detail further.

In the case of dud-loans, the trouble is merely being in “default” is no crime; as for “wilful defaulter’s names being made public, the courts again have to establish them as such. Just a mere pronouncement by banks is not sufficient. What can be reasonably deduced is that the current status quo on making public defaulter’s names will undergo a change.