Corporate Loan Defaults Rising and It’s The Banks’ Fault

4 comments Written on December 10th, 2013 by
Categories: Banks, Defaults
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Outlook has a great article about corporate defaults.

Accor­ding to the All-India Bank Employees’ Associa­tion (AIBEA), bad loans have gone up from Rs 40,000 crore in 2008 to Rs 1,90,000 crore in 2013. “In addition to the official bad loans data, there is Rs 3,25,000 crore of hidden bad loans in the name of restructured loans (often dubbed CDRs, or corporate debt restru­cturing) that are being passed off as good loans,” says C.H. Venkatachalam, general secretary, AIBEA.

It gets worse:

As a percentage of total bank credit, gross bank NPAs constituted 3.3 per cent in March this year, rising to 3.7 per cent by end-June. This figure could reach 4.4 per cent by March 2014, turning almost Rs 1 trillion worth of bank credit as NPAs within such a short span, rating agency crisil stated in its report last month. That’s why the government is increasin­gly being put under pressure to act and put the spotlight on corporate delinquency or what some call wilful fraud.

We’ve seen that corporate defaulter data is not often shared between banks. Not because they can’t share data. But because they don’t want to.

Most loans  have covenants where if the borrower defaults on any other loan to anyone else, this loan also becomes fully due. It is therefore horrible for a bank which has lent, say, Rs. 1,000 crores to a borrower, to find out that he defaulted on a Rs. 50 crore loan elsewhere. Because it is now obvious that if he can’t pay back 50 crores, he can’t pay back 1,000 crores. And that is a problem.

The way banks deal with this problem is: if I don’t know, I don’t have to care.

Meaning: if they know there is a default, the banks will have to then call in their loan, face a risk of the company being unable to pay, and therefore have to provision against a default. Provisions and subsequent losses hurt profits and capital, and banks have a natural disincentive for recognizing the problem.

It is quite likely that the bank is already aware that the company is in trouble. In fact, there may be some people in the credit department that are actively “managing” the loan, ensuring the loan doesn’t cross the 90-day-without-interest-paid clause. This is usually done with corporates, not with individuals; since there is so much more room to lend corporates money in a different guise.

The biggest defaulters should be sued.

Yet, no suit from any bank has been filed on Kingfisher Airlines. No suit on Windsome diamonds. Electrotherm was sued, but only for Rs. 98 crore worth loans. (Warning: This list is incomplete. Ut doesn’t include the biggest suit filed - of more than 2,200 cr - against Etisalad DB, by Stanchart and Citibank.)

India is supposedly “getting tough” on wilful defaults. But a cursory analysis of CIBIL suit filed data since 2002, using the simple search string “LIMITED” (since that is what corporates have to have in their name) tells you that the total suits filed against corporates is coming down!

Suits filed against defaulters

(Source: CIBIL)

If this situation doesn’t change, we are not just a crony capitalist society, we are also a crony banking system. RBI needs to act fast to penalize banks that do not file suits against all defaulters who owe them Rs. 1 crore or more, or attempt to sell collateral. And data needs to be shared instantly, and electronically, with PAN numbers of all companies and directors, so that all banks have systems to tell them to mark their loans as potentially bad immediately if a borrower has defaulted elsewhere.

The concept of restructuring should not be allowed without a severe penalty. Banks should be forced to recognize losses, and raise capital. We need to let banks fail if they have to.

The idea that a person defaulting is bad, but that a corporate defaulting is okay has oodles of moral hazard and cronyism built in. We often blame our politicians, but in this particular case, it’s our banking system that has failed to play its role.

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About the Author:
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at

4 comments “Corporate Loan Defaults Rising and It’s The Banks’ Fault”

There is a simple basic reason behind individual to corporate discrimination: The individual has a will to live, the corporation doesn’t have a will of its own to live. In the first case, that ‘will to live’ can be used against the individual to make him comply with a lot of things. Many times that ‘will to live’ extends to ‘will to live better’ and hence both poor as well as well of individuals can be easily leveraged. No such leverage exists with corporates, especially Limited companies.
Once you understand the above concept, it is easy to see why banks penalize individuals whereas they don’t squeeze the corporates that much. They do it simply because they can!
Here’s another analogy: In the forest/jungle, why does the lion eat the deer, but not the elephant? The primary reason is simply that the lion CAN eat the deer but can’t eat the elephant.
So, welcome to the economic jungle! Survive the lions one way or the other: outrun them, fight them back, trick them, misdirect them, do whatever, but don’t get caught out in the open, alone, defenceless. If you happen to commit such mistakes (like getting into credit card debt, take unpayable personal loans, require major hospitalization), expect to become the lion’s lunch!

Great article Deepak. This looks like one of your prescient warnings.

“We often blame our politicians, but in this particular case, it’s our banking system that has failed to play its role.” – pray tell us who runs the banking system or a major part of it?

From you own post on November 19th, 2013, one can see the share of public sector banks in this subprime pie. It is larger than the share of private sector banks. And it is not because loans to small time farmers, or SMEs. I bet some of the above mentioned defaulters and CDR cases are star customers of public sector banks.

Of course. THere is complicity of the government but these bankers have the right to stand up too. Also, the RBI can push banks by wielding a stick for those that don’t comply, also…

I had a travel experience where the co-passenger was working in SBI Bangalore. He coolly mentioned that they dress up the loan account with money from some other accounts to avoid those coming under NPA category.

Indians do not surprise me any day with their ingenuity in being unscrupulous!

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