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Random Reflections

RBI announced in August 2016, that it will move to cap exposure of Banks to large borrowers while also taking steps to deepen the Corporate Bond Market.

RBI stated that starting from next fiscal (2017), banks will have to set aside higher provisions for incremental lending to borrowers with a certain amount in outstanding loans from the Banking Sector.

Specified borrowers

The Banking regulator suggested the creation of a new segment of borrowers called “specified borrowers.”

A specified borrower was defined as anyone who has an aggregate fund based limit (ASCL) of Rs.25000 Crore in 2017-2018, Rs.15000 Cr in 2018-19 and Rs.10000 crores from 1st April 2019 onwards.

If a specified borrower was given more loan than suggested above, the bank will have to keep higher provision as the risk is higher.

The Banks were allowed to subscribe to bonds issued by the Corporate Houses which could be divested at any time.

Borrow from the market through bonds

The idea was to force large borrowers towards market borrowings and reduce systemic risk created by the concentration of bank funds in a handful of corporate houses.

To encourage the bond market and to get a better rating of bonds, RBI enhanced the credit limit to 50% from the banking system, though individual Bank could provide only upto 20% for bond issues.

These decisions announced during the tenure of Dr. Raghuram Rajan had a background.

WHY?

The Non-Performing Assets (NPAs) were concentrated more on large Corporate Loans. Various studies had suggested that the corporate houses should borrow through bonds and if their credibility is high, they will get more investment. Parliament Standing Committee on Finance also had made a similar recommendation. Though I am not an admirer of all the policies of Rajan, this was a correct decision.

Who are the top borrowers?

As of March 2015, the outstanding of top 10 Corporates was Rs.731000 Crores and the outstanding of 12 to NPAs was Rs.345000 Cores.

The top 10 borrowers as on 31st March 2015 as per Credit Suisse report were Reliance ADAG (Rs.125000 Cr) Vedanta (Rs.103000 Cr) Essar (Rs.10000 Cr), Adani (Rs.96000 Cr) Jaypee Group (Rs.75000 Cr), JSW Group (Rs.58000 Cr) GMR (Rs.48000 Cr) Lanco (Rs.47000 Cr) Videocon (Rs.45000 Cr) and GVK (Rs.34000). Many of them have become NPA.

Hence RBI had to take this policy decision. When we compare NPA write-offs of large borrowers, write off to farmers is a pittance. But the decision has not been implemented even after five years and corporate NPA is increasing. RBI is not willing to share the list of large borrowers, which is ridiculous.

RBI Data for the Financial year 2019 showed that 20 top borrowers owed Rs.14 lakh Crores which was 16% of the total exposure. Between 2018 and 2019, the overall loans increased by 12%, whereas Corporate Debts increased by 24%. Out of the total loans to industry, 50% had gone to these 20 corporates.

The RBI is closing its eyes when Adani, Ambani, Vedanta are borrowing more and more. So they are not implementing their own decision. It will not be a surprise if Adani Group, which has one of the highest Debt and Debt service Ratio goes bust. It has happened to Essar. It has happened to Anil Ambani Group. It has happened to Videocon, Lanco etc. It may happen to Adani group soon.

As of Dec 2020, the top 10 banks added Rs.80000 Crores to NPA in that quarter alone. This is in spite of the restructuring allowed by RBI.

So the danger is visible. RBI has to act immediately if the Banking System has to be saved. The Banks should be asked to implement the ceiling of Rs.10000 Crore to a Corporate Group immediately which should be brought down further. 

Corporates who want privatisation of Public Sector, saying the Private Sector is more efficient, should prove their worth by going to market with bonds or shares.

But if Niti Ayog, Govt and RBI want these Corporate Houses to become Global Champions at the cost of the people whose savings are at stake, no one can save us – Not even God. 

Time to wake up, shake up and break up the monopoly.

Thomas Franco is former General Secretary of All India Bank Officers’ Confederation.

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