 Hello and welcome to NewsClick. Today we have with us here Dr. Meera Nangyal, an expert on the issues of Indian banking sector. Welcome to NewsClick Dr. Nangyal. Right now there is a crisis of NPAs in the banking sector. In 2015 Dr. Raghuram Rajan has highlighted it and after that the RBI has withdrawn the regulatory forbearance because of which the NPAs have been revealed till then they were being hidden under the rubric of different categories but now I think about nine percent of banking sector loans are NPAs and credit system estimates that by 2018 16 to 7 percent of the banking sector loans would be NPAs. So can you explain how this NPA crisis has come about? It is no secret that the amount of NPAs has been growing and with each financial year like in 2016 to 17 to 18 and by 2019 we would have sort of you know resolved the situation. So it's like now reaching the peak 2018 is going to be the peak of this NPA crisis you know and when we talk of NPA what we actually mean is that the bank has given a loan to a borrower and the borrower is not repaying that loan either the principal or the interest amount. So that is a non-performing asset from the point of view of the bank and what it actually means is that you know over the years the RBI has been coming out with various schemes to resolve this crisis. So you know they had a corporate debt restructuring then they had a scheme where they said okay you know for infrastructure loans let the period of the repayment extend to maximum 25 years or they came out with a scheme where they said that the sustainable component where the business has cash flows let that be separated from the unsustainable component or they even said okay that the debt can be converted into equity shares and the bank can change the management of the business of the borrower. However all these sort of didn't really work in the manner that the government and the Reserve Bank were imagining. So then there was another level last year in May the Indian Bankruptcy Code was notified in 2016 okay and why these schemes have not worked is because you know these the crisis is mainly restricted to about 500 accounts and the 30 top borrower groups in India are involved in this whole business of borrowing money and what has happened is that the same borrower group has taken money from multiple banks besides it would be having other creditors suppliers of their you know raw material components so it's very difficult for all the creditors to agree to a solution because the problem is that the borrower is not able to repay the entire amount so everybody has to accept less so who accepts how much less you know we the technical term used is a haircut so how much of a haircut like the the situation has come to such a pass that it's almost like you need to go bald so if your loan was let's say 40,000 crores so the bank is being asked to accept 20,000 crores and if it was 60,000 take 30,000 crores so it's like a huge steep decline so you are not even saying now you're in that position where you are saying you know don't pay the interest pay interest as a less at a lesser rate okay don't even pay the principal amount pay a fraction of it so naturally the people who lend the money are not ready to accept that much less which is the reason why all these schemes have failed in the past and now what has happened is that on the 4th May of this year the Reserve Bank of India the government note brought out an ordinance and this ordinance empowers the Reserve Bank of India to direct the bank to you know push for a resolution of a case that is the bank is being directed that if your loan was 40,000 20,000 is what you will get and you don't have choice you have to accept this so it's like taking away the professional commercial independence of the bank and pushing them for a resolution so as you said the Reserve Bank's ordinance forces the banks to take a haircut so how will it affect each of them how will it affect the borrowers how will affect the lenders that are the banks will it be any any in any way beneficial to the banks no it's not going to be beneficial to the banks at all the beneficiary the first beneficiary of course is the borrower you know if I take a loan of 45,000 crores and in the end I'm told after many years of not making payment that okay instead of 45,000 crores pay 24,000 crores so or 25,000 crores so that means 20,000 crores I've saved that would have been on the debit side of my profit and loss account that would have been my expense it would have eaten into my profits so I have made a killing in that sense you know I may be playing victim that I'm making losses I'm not able to pay the loan back but actually I'm benefiting from it so any borrower who's able to get the loan amount reduced is making is a gainer then the second gainer is the company who is now bailing out this company this borrower company so they are buying assets maybe factories at a lesser reduced price in normal cost that factory would be much more worth much more because if you were to construct the factory from scratch you would spend money now you're only paying the amount of the NPA so the buyer is also a beneficiary so Birla's are a beneficiary an interesting case would be like Bhushan Steel was in talks with GSW Jindal Steel for a you know 55% share transfer and they would buy the factory but then it didn't work out they couldn't manage the deal and now Bhushan Steel is with the bankruptcy code it's in the 12 cases so now under bankruptcy its assets are going to be sold so naturally the price will come further fall down so now anybody can pick it up at a much lesser price so we also hear reports in the news of the companies with so-called NPAs who owe money to the banks their share prices are actually going up so are they really in that dire straits that they can't pay their loans see that you know one would have to do a very thorough analysis so one wouldn't want to make an irresponsible statement but it is true that you know because some of these companies have good assets so and now because only 12 have been referred for bankruptcy the others it means are for sale so anybody who buys them will buy them at less than the market price will have an asset and when you buy a loss making company you can set off the losses against the profits of your existing buyer company so obviously in the share market people who are investing in the share market they are also betting that these companies will now have fresh capital into them their factories will start running so they are a good bet so they are willing to bet on it and rightly so so they will gain out of it you know but what question arises is that you know what what is the response of the government or the reserve bank to this crisis like if we are saying that banks have ended up making these losses then what is the accountability of the bank you know is somebody questioning them why they ended up with this huge amount of loss was it an error of judgment that they did not have the skills they did not foresee that these loans would not be recovered or it is also true that they were giving loans they were increasing their exposure to the same borrow group for the same assets like 27 banks are lending to the same borrow group for the same asset so then is that asset worth that much money like for example if I go to buy a house or a car so if I want to buy a car for 10 lakhs the bank will only give me a 75% of 10 lakhs and at max if I'm a very good borrow you know I have a stable income coming in or something they'll give me 90% always less than the value of the asset but here the banks have given more than the value of that asset so then why have they given more than the value of the asset you know is it because the corporates were offering them some incentives you know are these cases of corruption which have resulted in this or is it because the government wanted them encourage them to give loans because these industries are important for development in the country if that is the case then these banks are instruments of development of state policy then we can't label a bank as inefficient you know then we can't use the argument public sector banks are inefficient and they should be privatized so then that fails and if they are corrupt then why should they not be punished why should they be given immunity you know that is a question that we should ask thank you for watching newsclick please keep watching us at newsclick.com