Banks up to tricks with bad loans again?

Source: The post is based on the article “Banks up to tricks with bad loans again?” published in Business Standard on 5^th June 2023.

Syllabus: GS 3 – Indian Economy – Money & Banking

Relevance: About Evergreening of Loans

News: The RBI governor in a conference of the directors of public-sector banks (PSBs) has made comments regarding tricks adopted by banks to conceal the real status of stressed loans.

What are some of the tricks adopted by PSBs?

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What is the effect of evergreening loans on private and public sector banks?

In private banks, shareholders bear the brunt, promoters may be removed and even face legal consequences.

In contrast, when PSBs mismanage their finances, no significant action is taken against bank chairman, board of directors, or officials.

Hence, there is lack of accountability in PSBs due to the absence of core reforms, which has significant implications for the overall banking system.

Must Read: RBI governor cautions against evergreening of loans: Are banks, corporates still window-dressing loans?

Why do PSBs suffer more loss than the Private sector banks?

PSBs hold a significant portion of people’s savings and play a crucial role in providing loans to small businesses, farming, and acting as the primary channel for government schemes, subsidies, and pensions.

However, despite having the potential to make profits, PSBs have often incurred losses or minimal profits.

The main reason for the losses is the prevalence of corruption in lending to unreliable projects that ultimately fail. A large number of small and big businesses have also burdened PSBs with staggering bad loans.

What is the current situation of bad loans in the PSBs?

As per the Union Finance Minister Nirmala Sitharaman, scheduled commercial banks had written off bad loans of ~10 trillion in five years and only 13 percent of the write-off had been recovered.

Further, the cumulative recovery of bad loans through the Insolvency and Bankruptcy Code (IBC) until September has been just 30.8 percent.

Moreover, more than 90 percent of the bad loans originate in PSBs and many loans are designed to go bad. When a case is referred to the IBC, there are almost no assets left to recover.

What can be the way ahead?

Factors such as bank recapitalization, gradual resolution of bad loans, and overall economic growth have led to a significant increase in the shares of PSBs since 2020.

However, given the current scenario of evergreening loans, this can again make banks suffer losses. Hence, the measures by the RBI to check such activities are appreciated.