India’s top court steps in to clean up toxic assets in the banking sector

The high power.
The high power.
Image: Reuters/B Mathur
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The toxic loan problem in India’s banking system has become so grave that the country’s highest court has now stepped in to gauge the situation.

On Feb.16, a bench of the supreme court of India sought to know from the Reserve Bank of India (RBI) the names of firms that have defaulted on loans worth Rs500 crore ($73 million) or above.

“We direct the RBI to file a detailed affidavit mentioning about the list of the companies which are defaulters of loans,” chief justice of India T S Thakur, who led the bench, said while reading out the order. The RBI has six weeks to submit the list.

The court’s decision could not have been more timely. India’s banks are bleeding due to the massive amounts of bad loans in the system. In the last two weeks, several public sector banks have reported a huge drop in their third quarter profits. India’s largest lender by assets, State Bank of India, posted a 62% drop in profit. Others, including Allahabad Bank, Dena Bank, and the Central Bank of India, have reported losses.

This is mainly because the banks had to increase provisions towards non-performing assets (NPAs) in order to cover for defaults by March 2017—a target set by the RBI.

The gross NPAs among India’s listed banks have reportedly shot up to Rs4.38 lakh crore as of the October-December quarter, compared to Rs3.4 lakh crore in the previous quarter.

Corporate defaulters

Most toxic loans in India belong to mid-size and large companies. The loans turn into NPAs when their principal or interest payment is delayed for more than 90 days—that means they have default.

India has already seen instances of big corporate defaults in the last few years. The most prominent one was Kingfisher Airlines, the beleaguered airline owned by Vijay Mallya. The company owes over Rs7,000 crore to nearly 17 banks.

Other defaulters from the past decade include Winsome Diamonds, a jewellery maker, and newspaper publisher Deccan Chronicle Holdings.

As of September 2015, of the total gross NPAs, restructured loans and written-off loans, 31.5% belonged to medium-sized companies, according to data from the RBI (pdf).

Meanwhile, hardly any of these borrowers have been penalised heavily for their bad loans. RBI governor Raghuram Rajan has in the past said that big corporate “wrong-doers” should not be spared.

“Not only are we accused of not having the administrative capacity of ferreting out wrongdoing, we do not punish the wrong-doer—unless he is small and weak. This belief feeds on itself. No one wants to go after the rich and well-connected wrong-doer, which means they get away with even more,” he wrote in a letter to RBI employees last December.

But India’s top court, it appears, has other plans.