Arshad Shaikh studies the recently announced change in RBI’s policy regarding compromise settlements with wilful defaulters. This shocking decision is akin to rewarding the guilty by punishing the innocent. Bank unions and the Opposition have criticised the move. However, the lack of public outrage over the latest circular by India’s Central Bank that may well see a wiping away of lakhs of crore from our coffers means that we will continue our journey on the path of “organised loot and legalised plunder”. Banking regulation will remain a façade with maleficence having a field day. In the end, the ordinary taxpayer bears the burden of this unholy alliance between crooks and those in the highest echelons of power.
The numbers that are coming out after news broke out that the Reserve Bank of India (RBI) is tweaking its policy on settling loan payments with wilful defaulters are both numbing and staggering. A wilful defaulter is a borrower who refuses to repay the loan amount despite having the financial capacity to do so. A defaulter, in contrast, is one who is unable to pay because of financial difficulties. Thus, minus the jargon, a wilful defaulter is nothing but a fraudster or a cheat.
According to Credit Information Bureau (India) Limited (CIBIL) data, Indian banks are reporting over 16,044 wilful defaulters. As of December 2022, the cumulative debt that these defaulters owe amounts to an astounding sum of `3.46 lakh crore. Public sector banks (PSBs) have a lion’s share of 85% (`2.92 lakh crore) in this amount with the State Bank of India (SBI) claiming an outstanding sum of `79,227 crore (1,881 accounts) to be recovered from these wilful defaulters.
Similarly, the other PSBs have amounts such as – Punjab National Bank (`38,333 crore, 2,143 accounts), Union Bank of India (`35,561 crore, 1,747 accounts), IDBI Bank (`23,601 crore, 335 accounts) and Bank of Baroda (`23,879 crore 2,203 accounts). Private Banks saddled with the burden of wilful defaulters are – Axis Bank (`2,005 crore, 607 accounts), ICICI Bank (`2,136 crore, 59 accounts) and HDFC Bank (`505 crore, 49 accounts).
To understand the level of deterioration in fund management, we simply have to look at the graph of the amount owed by wilful defaulters to India’s banking industry. It is reported that wilful defaults in India grew ten-fold from 2012 to 2022 and amounted to `2.4 lakh crore.
In the last two years itself, money owed by wilful defaulters grew a staggering 41% (more than Rs one lakh crore), climbing from `2,45,767 crore in December 2020 to the present `3,46,479 crore.
What is happening is unacceptable and unforgivable. Yet there is very little outrage over this potential emptying of our coffers in the name of settling recoveries from white-collar thugs. What happened to our foolproof banking regulatory regime and the much-touted Insolvency & Bankruptcy Code (IBC) that was supposed to recover outstanding amounts from corporate companies in a phased manner? Obviously, cleanup operations are not working. What is required is a new system.
RBI’S DANGEROUS NEW FRAMEWORK
The RBI issued a circular on June 8, 2023, titled “Framework for Compromise Settlements and Technical Write-offs”. It allows banks to enter into compromise settlements with a borrower who has been classified as a wilful defaulter.
Compromise settlement refers to a negotiated settlement wherein a borrower offers to pay an amount less than the total amount due to him/her under the loan agreement. The bank agrees to accept this drastically reduced amount as full and final settlement of its dues. This involves a certain sacrifice by way of write off and/or waiver (banks love to call it a “haircut”) of a portion of its dues on a one-time basis.
Another issue that sparked concern after the RBI circular was the permission for banks to re-issue loans to wilful defaulters after a mandatory cooling period. Veteran journalist Sucheta Dalal explained the significance of this decision, saying – “Remember, bank bailouts are largely for PSBs whose boards are packed with political appointees with little knowledge about banking. They will now decide on compromise and settlement, with politically connected accountants and lawyers who are appointed as independent directors to bank boards.”
TV Gopalkrishnan, a retired central banker, says, “In India, unfortunately, banks, in general and PSBs in particular, are sources of loot and, unlike in any part of the world, this loot is officially categorised as Non- performing Assets.”
In 2016, the Chief Justice of India, T S Thakur asked the Solicitor General, “People owe thousands of crores to the public banks… it is a big fraud. Top ten public sector banks have written off `40,000 crore alone in 2015. It is all there in this Indian Express report. Public financial institutions are lending money despite knowing no returns. RBI is supposed to keep a watch on these banks. What are you doing about it?” India’s top legal officer had no answer.
In the famous Arabic folk tale “Ali Baba and the forty thieves”, the only thing the thieves have to do to access their loot and booty hidden inside a cave is to utter the code words “khulja sim sim” (open sesame). It seems wilful defaulters have it even easier in India.
BURDEN FALLS ON ORDINARY CITIZEN
Those defending the RBI’s decision point out that this is not a new policy but a continuation of its earlier position regarding the recovery of bad loans and negotiating with wilful defaulters. They say that the permission to start loaning to these defaulters after the cooling period sends a message to the industry that the government is pro-business and the company (and the economy) should not suffer because of the mistake of a few individuals. Criminal proceedings against the wilful defaulters will continue in parallel. The company might have new promoters who should not bear the burden of their dishonest predecessors.
Moreover, this will allow banks to get back at least some percentage of their stressed assets. Litigation will take years and not yield much after that. This is a clear-cut admission of incompetence to manage funds given in the custody of banks by depositors. Why do banks not extend this benevolence to the common person struggling to pay his EMIs on time?
The All India Bank Officers Confederation (AIBOC) and All India Bank Employees Association (AIBEA) issued a press release opposing the RBI. The bank unions averred, “It is worth noting that wilful defaulters significantly impact the financial stability of banks and the overall economy. By allowing them to settle their loans under the compromise, the RBI is essentially condoning their wrongful actions and placing the burden of their misdeeds on the shoulders of ordinary citizens and hardworking bank employees.”
A NEW SYSTEM
If we look at the problem from a different lens, we realise that it is greed, avarice and a complete lack of accountability, which created this problem in the first place. We have created a “money-economy” that is dominated by lenders who charge interest for extending credit. We have glorified living beyond our means through borrowing and idolised people based on the size of their bank balance.
The economy is geared for producers to produce more than required and consumers to consume more than they can afford. In the age of materialism, hedonism and utilitarianism, it is time to return to the “social-economy” where money is a means and not the end. Social relations take care of people who are not left to the mercy of the “market”. Lenders are not allowed to charge “interest” to borrowers; rather they are encouraged to forgo their claims if they find their debtors in strained circumstances.
The Prophet Muhammad ﷺ said, “The best of you are (those who are) excellent in repayment (of their loans).” He also praised those who were lenient and soft towards their borrowers. It is time to think about designing a new system. A system where there are no wilful defaulters and no loan sharks.