Long-term lenders a must for India's industrial growth

Hyderabad: Nearly 15 years ago, the then finance minister Jaswant Singh had described the non-performing assets of around Rs 83,000 crore in banks as “loot, and not debt”. Coming back to this day, the bad loans in the banking system have risen by nearly 6.5 times to Rs 6.15 lakh crore. The perception about bad loans has continued to be so — the loot. NPAs or bad loans, however, are not so simple to be described with one word. While bad loans have been a long-standing problem for the Indian banking sector, their size was not as huge as it is now.

During 1980s and earlier, commercial banks used to lend mostly small businesses whereas specialised lenders like Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, and Industrial Finance Corporation of India and state industrial finance corporations used to cater to the funding requirements of big corporate. Specialised lenders were converted into banks under the recommendations of the Narasimhan Committee as they did not find enough funding sources in the country. As a result, banking experts say, the entities focused on industrial finance ceased to exist and commercial banks, which raise money from individual depositors, were allowed to finance corporates, leading to pile up of bad loans.

Mr Udit Kariwala, senior analyst, financial institutions, Ind-Ra, blames commercial banks funding infrastructure projects with long gestation periods, commodity cycles and poor risk assessment. “Banks, if you look at their liability profile, have short tenor book. Most of their borrowings — from people as deposits — would have on an average one to three year tenor. So they are not equipped to do a 10- or 12-year long lending from the asset-liability mismatch point of view. So theoretically they may say that they are lending for four years, but then they have to go restructuring for further extension.” One of the solutions to address this issue could be setting up of institutions that can provide long-term loans and have the ability to monitor deviations in asset quality.  “There could be some financial institutions, wh-ich raise money through long-term borrowings, for financing long-tenor projects. The long-term liability profile would allow them to have a more realistic underwriting from the perspective of asset-liability mismatch,” Mr Kariwala said.

While setting up project finance companies could prevent money of small depositors ending up in bad debts, record suggests that any institution under direct or indirect government control would could end up accumulating bad loans as previously industrial finance institutions had seen. NPAs of these institutions and shallow funding sources were the main reasons for abandoning specialised industrial lenders. According to reports quoting CBI officials, NPAs in 2001 were as high as '1.9 lakh crore. The government of the day led by Prime Minister Atal Behari Vajpayee admitted only Rs 83,000 crore.

According to an RBI Inspection Report of IDBI on March 31, 2000, IDBI’s top 10 defaulters are Indian Charge Chrome Ltd with a debt of Rs 493.28 crore, Malvika Steels Rs 476.24 crore, JK Corporation Rs 400.57 crore, Mideast Integrated Steel Rs 171.93 crore, Rajinder Steel Rs 137.37 crore, Krishna Filaments Rs 121.30 crore, Prag Synthetics Rs 87.56 crore, IFB Industries Rs 84.57 crore, Bell Ceramics Rs 79.96 crore and Kalyanpur Cements Rs 78.95 crore. For example, ICCL, which topped the year 2000 defaulter list of IDBI, is a classic case of global factors affecting a domestic company. The company, which was into chromate mining, was hit with market shock after the disintegration of the Soviet Union and economic liberation in India.

Timely action could have averted accumulation of bad loans. But banks and financial institutions waited till 2002, only to write off Rs 2,400 crore loans owed by Odisha-based Indian Metals & Ferro Alloys Ltd, which guaranteed the loans of ICCL. If it was not paid yet, the write-off would be worth Rs 5,788 crore after adjusting to inflation. A former director of a public sector bank, who refused to be quoted, feels that project finance companies could be successful only if they are in private hands as any kind of external influence could make them finance non-viable projects. “Project finance companies have two benefits. They will offer investment opportunities to long-term investors like pension funds, insurance companies and sovereign wealth funds. And they will also prevent the money of small investors from facing vagaries of industrial finance.”