Loan defaults do occur in the banking industry and these may occur for a variety of reasons which are beyond the control of the creditor
In an attempt to calm down the mass hysteria over stressed assets in the banking sector, Vinod Rai, chairman, Banks Board Bureau, pointed out that not all loan defaults were wilful and not all lending activity, even if it is to salvage such stressed accounts, could be branded as corrupt practice or criminal misconduct. “We cannot allow normal loan advancing activity to come to a standstill based on the experience of a few cases of mismanagement”, he said. It needs to be recognized that all loan defaults cannot be viewed as corporate frauds and all such decisions of banks to provide the loans as acts of malfeasance which would be a grave travesty of justice, Rai added.
He urged against creating a large scare in the sector and suggested lending activity be accelerated to support an economy that wanted to rapidly accelerate growth but advised banks to lend only after ensuring the proposals were professionally appraised and transparently analyzed. While acknowledging the banking sector had seen considerable stress in recent year, he warned against allowing the cacophony of uninformed voices to debilitate the decision-making capability of bank executives. “ Projects do have time and cost over-runs. Quite often the problems are creations of the global economy,” he pointed out.
While there was a need to address the stressed assets issue with urgency and diligence there was no need to debate ad infinitum the escapades of one or two industrialists, Rai suggested. Nevertheless, these need not be magnified to create an alarmist situation leading to a backlash wherein banks become risk-averse whether in lending afresh or settling old cases,” Rai said.
Loan defaults do occur in the banking industry and these may occur for a variety of reasons which are beyond the control of the creditor, he said. These defaults merely amount to a breach of contract and hence are not necessarily criminal in nature and It would attract criminal prosecution only if fraudulent or dishonest intention is established, Rai said. Defaults occurring on account of a downturn in the economy or adverse external factors cannot be construed as cheating or borrowing with a mala fide intent, Rai said. Unless intent is established, decisions by banks to lend money to revive or turn around a stressed asset should not, per se, provide a ground for suspicion, the BBB chairman said.
Rai was speaking at the National Institute of Bank Management’s in Pune at the 12th convocation of the PG Diploma in Management (Banking and Financial Services)on Wednesday. He pointed out that banks had faced such problems in the past whether it was the Southeast Asian crisis in the 90s or the financial meltdown of 2007. Indian banks underwent very challenging times, but emerged stronger, he said. Public sector banks in particular played a stellar role in energizing economic growth and provided much needed resources in 2007 when the world was struck by the meltdown, he said.
Call for greater vigilance when bank executives take decisions to advance loans or conclude settlements of stressed loans he said such vigilance oversight should not be seen as hounding. “In cases where prudence was ignored, naturally the attention of vigilance agencies would be attracted. Public money should not be allowed to be cornered by vested interests for their insidious designs while the small borrower is hounded and driven to such extreme steps as suicides,” Rai said.
The attempt will always be to defend transparent and well-considered decisions taken in good faith which went awry for conditions beyond the control of the lender or the borrower, Rai said. These are acts of omission and do occur in any decision-making process and they need to be addressed for an early resolution. It is decisions which suggest of collusion and mala fide intent that would attract vigilance oversight, he said.