Willful Defaulters: Have money, won’t pay – Madhura Karnik

Arun Jaitley & Arundhati Bhatacharya

Madhura KarnikA wilful defaulter is one who fails to repay the lender despite being able to, or uses the funds meant for repayment for other activities. – Madhura Karnik

Indian banks are in trouble, and the trouble-makers refuse to toe the line.

Up to 8,167 borrowers—despite their ability to repay—have defaulted on Rs76,685 crore ($11.4 billion) of loans taken from public sector banks in Asia’s third-largest economy. Answering a query in the Rajya Sabha on July 19, India’s finance minister Arun Jaitley said cases have been filed against 1,724 such entities, called wilful defaulters.

A wilful defaulter is one who fails to repay the lender despite being able to, or uses the funds meant for repayment for other activities.

The bad news is that this may just be a fraction of such defaults.

Bad loans are a sticky issue among Indian banks staring at huge losses due to these toxic assets. An estimated Rs 13 lakh crore in bad loans have bogged down the banking system itself, prompting everyone—from the Reserve Bank of India (RBI) to the government—to fire-fight.

RBI governor Raghuram Rajan had directed banks to make provisions to cover such loans by March 2017. This has resulted in a massive erosion of profits of many big lenders. Rajan has said that the RBI will soon make the list of wilful defaulters public.

The government, on the other hand, announced on July 19, that it will infuse Rs 22,915 crore as equity in public sector banks in an effort to strengthen their weak balance sheets.- Quartz, 20 July 2016

» Madhura Karnik is a writer for Quartz, based in Mumbai. She is interested in economics, business and impact investing. 

Vijay Mallya

3 Responses

  1. Billionaire’s Fund Says India Bad Loan Battle to Outlast Rajan – Denise Wee – Bloomberg – July 22, 2016

    The head of a credit fund controlled by Indian billionaire Uday Kotak said the government’s push to rid banks of bad loans will outlast the departure of a central bank governor who battled the problem.

    Reserve Bank of India Governor Raghuram Rajan, who set a deadline for Indian lenders to clean up their soured debt by March 2017, leaves office in early September. The banking industry’s gross bad-loan ratio jumped to a 13-year high of 7.6 percent at the end of March,

    “I doubt it whether regulators and policy makers can start going easy,” said S. Sriniwasan, chief executive officer of Kotak Special Situations Credit Fund, which is part of the Kotak Mahindra Group controlled by Kotak. “If one goes by the actions of this government they are unlikely to play along with the so-called crony capitalists.”

    During Rajan’s tenure, the government strengthened creditor protections with an overhaul of century-old bankruptcy laws. Any backtracking on such steps could lead to investors losing confidence when the nation’s lenders are battling more than $100 billion of stressed assets and need foreign investment.

    “Foreign investors need to see a continued focus on the financial sector and bankruptcy code reform or else it won’t take long for them to lose confidence,” said Mihir Chandra, head of research for Asia at Hong Kong-based SC Lowy, an independent fixed-income firm.

    Foreign investors that have rushed to India include Brookfield Asset Management Inc., Canada’s largest alternative asset manager. It signed a memorandum of understanding with State Bank of India to set up a joint venture to invest in stressed assets in India, according to a statement Wednesday.

    Canada Pension Plan Investment Board partnered with Kotak Mahindra Group to invest as much as $525 million in stressed assets in March.

    The sheer scale of India’s opportunity has attracted investors, according to Sriniwasan at Kotak Special Situations Credit Fund. The fund is part of the Kotak Mahindra Group’s alternate assets management business, which raised $2.5 billion since it was set up in 2005, according to a statement in March.

    Better Prices

    “The nature of the problem today requires large sizable checks which was probably not the case 10 years ago,” Sriniwasan said, adding that he expects prices for soured loans to drop. “It looks like we are probably a few quarters away before some of those transactions will start happening at more acceptable prices to investors.”

    Indian banks have already made provisions for bad loans which has hurt their profitability. Some of the banks do not have the balance sheet strength to take the hit which has held up soured loan sales. The Indian government said this week it would inject $3.4 billion of capital into state-owned lenders, which helps them to shore up their capital as they face the 2017 deadline.

    “Beyond a point, you cannot keep kicking the can down the road,” said Sriniwasan. “We are nearing the end of the road.”

  2. There was a time when the State Bank of India was considered the safest bank in the world. Even foreigners brought in huge funds to deposit in SBI accounts for safe-keeping. Today the SBI is bankrupt and about to default. What a sad state of affairs—and does it not also reflect on Rajan’s tenor as RBI governor?

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