Analysis of the NPA crisis in India - Signals were ignored


Non Performing Asset (NPA) has become the latest buzzword in the Indian banking corridors. It has left behind words such as Growth, Profit and Expansion by a huge margin. A huge churning is taking place in the Indian banking sector. A sector which had worked under an opaque system which allowed the fraudsters inside and outside the banks to defraud the banks. The reporting systems were also built in such a way that there was lack of intra and inter bank communication. The fraud that was uncovered at the Punjab National Bank was a result of such a system where there was a delay in communication among branches, between branch and the regional headquarter and among different banks. There have been allegations of round-tripping of money and bribes to the bankers for last many years. Round tripping happens through multiple subsidiaries that companies may set up. When the parent company has to payback the money to the lender (usually a bank), one of the many susidiaries goes back to the same bank or any other bank to seek a loan. Once this loan is sanctioned, it is partially or wholly spent in servicing the loan of the parent company. But most of them were never probed or there wasn't any kind of closure.

Public sector banks have been the worst affected lot. These banks lack accountability towards customers, investors and the tax payers. They know for a fact that in case of a crisis, the government will have to bail them out.

  Indian Banks and their NPA numbers

Table 1

NPA reprted by Indian banks

NPA reported by the Indian banks

IDBI Bank tops the list in terms of Gross NPA percentage. Almost 30% of the amount it has lent to the borrowers has become non-recoverable. Most of the borrowers are companies that have either shut down their operations or willfully not paid the money back. There are allegations that many of these companies have swindled away the loan amount that they had received.  A bank may write off a loan and report it as a loss in the books. In case it can recover the written off loan, it has to report it back in the books as income.

It is a risky business

Running a business is full of risks. There is always an uncertainty involved at every step. Businesses need loan to grow to the next level. Until a company has built enough reserves of its own, it must seek money from lenders. No lender is going to lend money unless it has been sufficiently verified that the borrower has enough means to repay the loan, hence due diligence is necessary at all levels.

A business may fail due to circumstances that cannot be controlled. For instance, a company may have been producing a product which is no more in demand or a company may have just one client who has closed the factory. Even under such circumstances, a bank should be able to recover the loan amount after liquidating the assets.

It requires lack of integrity on both the sides

For a fraud to take place not every banker or auditor has to be pliable. You need only those to lack integrity who matter. The bribe need not be in the form of money as it involves a lot of hassles. A bribe can be given in kind such as a Rolex watch, a fully sponsored foreign trip, transfer of a plot, a flat in the property being developed, an expensive set of jewellery, a bottle of an expensive scotch, fully paid stay at a five-star hotel or any other means.

After digging into the list of willful defaulters we have found a few familiar names and a lot more unfamiliar names who have contributed to the losses reported by the banks.

Table 2

Bank Defaulters List

We found an article, published by Business Standard, which has listed Zoom Developers as one of the willful defaulters listed by the UCO Bank. Zoom Developers has defaulted on an outstanding loan of Rs 309.50 crore. Punjab National Bank ) PNB) (see Table 2 ) has also listed Zoom Developer as a willful defaulter. Most of the top defaulters at PNB are into diamond or jewellery business.

We chanced upon a name, PAILAN EDUCATIONAL TRUST, in the UCO Bank's willful defaulters list. This company has defaulted on an outstanding due of Rs. 23.94 crore. We found the same company in the Allahabad Bank's defaulters list, the default is on an outstanding amount of Rs. 27.05 crore. The promoter, Mr. Apurba Saha, features as promoter of another defaulter company in the list published by the UCO Bank. The company is ACSON AGRO PRODUCTS EXPORTERS & BUILDERS PVT LTD and the outstanding loan amount was Rs. 8.95 crore. This would not have happened if the banks had shared information among themselves.

We found another set of companies (with same person as the promoter) in the list provided by the Allahabad Bank >

Table 3
Company Outstanding (? crore) 

This company may have had problems due to crash in steel prices, but this case should be investigated. 

Table 4
Company Name Outstanding  (? crore)
Amtek Auto Limited 1574.48
EPC Constructions India Limited [EPCCIL] (Formerly known as Essar projects (India) Ltd.) 915.00
S Kumars Nationwide Limited  834.23
Kingfisher Airlines Ltd. 695.50
IVRCL Ltd.  558.47
Ruchi Soya Industries Ltd. 4464.97
Gupta Coal India Pvt. Ltd .  451.26
Era Infra Engineering Limited 410.82
Unitech Limited 395.00
Deccan Chronicle Holdings Ltd. 269.33
ACIL Limited  268.84

Is it a mere coincidence that three out of the top seven banks, in terms of gross NPA percentage (%), are Kolkata based? NPA numbers of the Public Sector Banks (PSB) is still suspect, it is possible that the numbers have been underreported.


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