Low Recovery rate of PSU Banks from written off loans

The central finance minister has asked banks to recover at least 40% from the written off loans. When a middle class person or MSME takes a loan, the bank recovers easily 100% since it has collateral value with it. But when it comes to politically recommended loans, there is no collateral.

UPA government had given several thousand "dial a loan" to the extent of thousands of crores. Neither the bankers nor the politicians nor the wilful defaulters have been booked for defrauding the PSU banks of so many lakh crores. NDA govt which called in the scams in 2014 campaigns is now finding that recovery is weak. Infact, many of these loans are written off quietly. Politician-Banker nexus ensures that neither exposes the other and hence the wrongdoing is not pursued resulting in lakhs of crores loss to the government.

Currently, the recovery rate is just 14 percent of the written off loans worth Rs 7.34 lakh crores.It has been a tradition in India that most wilful defaulters rush to the ruling party for protection from CBI and ED. It has infact been a tradition to use both agencies to absorb them into the party. Out of the 7.34 lakh crores, there would be many loan defaulters from government loan schemes. Many of the smaller credit loans are treated by borrowers just like agricultural loans which many farmers do not bother to pay since they know at elections time, their loans will be written off.The bankers who actively pursued loan recovery remain at the receiving end with these write-offs.So let us assume that out of these 7.3 lakh crores, half are corporate NPAs, roughly around 3.5 Lakh crores. 

This is a big systemic issue. What happens to the funds in NPA firms? Are they laundered before being declared NPA? In Sarkaaru Vaari Paata movie, the wilful defaulter who owes 10,000 crs to banks, says he gave 3000 crs to Delhi bosses for elections, 1000 crs to each of the two telugu states and used 5000 crs for his business. This is how a NPA loan is used, says the villain. 

All in India know why middle class loans are recovered fully but politicians loans are written off.It is because middle class loan is backed by collateral whereas politically aligned firms get thousands of crores without any collateral and hence recovery is weak.  In other words, the taxpayer slogs hard to pay to make the rich richer. Till this movie got released, no one in India knew why banks recover so low a percentage from banks. This is a fictional movie. This movie offered a possibility that  perhaps this might be the reason why banks recover such a low percentage since half of it goes to political parties.It is ultimately the taxpayer who pays for these politicians' growth and funds to political parties. 

The finance minister herself clarified once that the process of retrieving money of investors from loan defaulters is very complicated due to lengthy legal process and multiple claimants to the seized assets. Many wilful defaulters ensure that regular payments go to their dummy firms as first creditors. This way, the revenue they keep generating goes to them instead of PSU banks under recovery.

SVP is too far-fetched resolution of a genuine systemic issue. If we were to go by SVP calculations, say if corporate NPAs are 3 lakh crores, 1 lakh crore might have gone to Delhi parties, 50,000 crores to local parties and 1.5 lakh crores taken by the wilful defaulters and sent abroad through money laundering. Too much imagination. But people are wondering that there might be some semblance of truth in what SVP conveyed and perhaps political parties are benefiting from the NPAs. The movie introduced that doubt and this is going to persist in society for a long time.