When the Rs 11,400-crore loan scam involving diamond merchant Nirav Modi hit Punjab National Bank in February, calls for the privatisation of public sector banks grew louder. The government’s Chief Economic Advisor Arvind Subramanian and industry bodies like the Federation of Indian Chambers of Commerce and Industries and the Associated Chambers of Commerce of India argued that privatisation would reduce banking frauds.

A month after the PNB scam, however, controversies involving ICICI Bank and Axis Bank have put the spotlight on the functioning of private banks. But the question raised in the wake of the PNB scam still remains: do private banks face fewer frauds than government banks?

There is no data in the public domain on the extent of loan frauds in private and public banks. But data is available on the legal cases filed by banks to recover wilful defaults from large borrowers. When a bank believes that a borrower has defaulted in making repayments despite having the capacity to pay, has diverted the funds for other purposes or siphoned them off without its knowledge, it is considered a wilful default or loan fraud.

Banks are expected to report such suspected loan frauds to credit information companies after they have started legal proceedings against the defaulters. Data from one of the largest credit information companies for the past 10 years shows that more private banks have filed legal cases to recover a larger share of their bad loans than public banks.

This could mean two things. Either the private banks are more active than the public sector banks in filing legal suits against wilful defaulters, or they have a higher burden of loan frauds than public sector banks.

Bank frauds and the NPAs

Non-performing assets, also described as bad loans, are considered the most objective criteria for measuring the health of banks. A loan is declared an NPA if the borrower fails to repay the interest and/or the principal amount for at least 90 days. The smaller the proportion of NPAs in the total lending of the bank, the healthier the bank’s finances. That is because banks are expected to set aside a share of their profits to offset the likely losses from such loans.

The gross NPAs of the Indian banks have been rising sharply over the past few years. After staying below Rs 1 lakh crore between 2006 and 2011, they galloped to Rs 8.85 lakh crores in December 2017. The bulk of the current gross NPAs of Indian banks – Rs 7.78 crore of Rs 8.85 crore – come from public sector banks.

But not all NPAs are considered frauds: wilful defaults make up a small part of NPAs. A larger chunk comes from cases where borrowers have defaulted on account of other reasons such as the industrial projects becoming unviable. Public sector banks have been criticised for having a higher share of their overall lending stuck in the form of NPAs. But what is the share of loan frauds in their NPAs and how does this compare to private sector banks?

Four charts

All banks are required to submit the list of wilful defaulters and the extent of their borrowings to the Reserve Bank of India. This information is not made public. But faced with questions in the wake of the PNB scam, the government released data in Parliament in March on wilful defaulters in public sector banks. The data showed that till December 2017, wilful defaults accounted for Rs 1,10,050 crore or about 7% of gross NPAs of public sector banks.

The government has, however, not released similar information for private banks. Private banks are also not covered under the Right To Information Act. This makes it difficult to compare the actual extent of loan frauds in private and public sector banks.

But the Reserve Bank of India requires all banks to periodically report the details of big loan defaulters against whom they have initiated legal proceedings to credit information companies, with the aim of alerting other lenders against such defaulters.

One of the largest such credit information companies is Credit Information Bureau India Limited or CIBIL. It maintains data on suits filed by more than 40 banks against all defaulters of loans of Rs 1 crore and above, and wilful defaulters of loans of Rs 25 lakhs and above.

Scroll.in reviewed bank data from CIBIL for the last 10 years, calculating the value of defaults for which legal suits had been filed as a percentage of overall NPAs, both for public sector and private sector banks. The analysis showed this percentage has stayed steadily higher for private sector banks compared to public sector banks.

As on December 31, 2017, wilful defaults or loan frauds of Rs 25 lakh and above which have been reported to CIBIL accounted for 14.2 % of the gross NPAs of private banks. This figure for the public sector banks was 12.3%.

For loan defaults of Rs 1 crore and above which have been reported to CIBIL, this figure was even higher for private banks. In December 2017, such defaults accounted for 42.9% of the NPAs of private banks. For the public sector banks, this figure was 33.1%. These numbers were higher for the public sector banks till 2012, but the trend changed from 2013 onwards.

Ranked according to the percentage of NPAs that have been reported as wilful defaults of Rs 25 lakhs and above, private banks are ahead of public sector banks. The value of suits filed against such wilful defaulters was highest for Kotak Mahindra Bank at 192.1 % of its gross NPAs.

Since loans frauds resulting in legal suits are only a subset of a bank’s overall NPAs, what explains their value outstripping Kotak Mahindra’s gross NPAs? Generally speaking, a possible explanation could be the flux in bank NPAs – a lot of defaulting loans are restructured. Some of the legal suits from the past might no longer reflect as NPAs.

More specifically, Kotak Mahindra Bank has clarified to journalists in the past that it has an Asset Reconstruction Department that buys stressed and non-performing assets from other banks, and the list of willful defaulters reported to CIBIL include such assets.

Among private banks, Kotak Mahindra is followed by Dhanlaxmi Bank (73.1% of gross NPAs) and Indusind Bank (59.9% of gross NPAs).

Among the government-owned banks, Vijaya Bank has the highest value of suits filed against such wilful defaulters (52.5% of gross NPAs), followed by Indian Bank (24.7% of gross NPAs) and Punjab National Bank (21.9 % of gross NPAs).

To the defaulters of Rs 1 crore and above against whom the banks have filed suit, Dhanlaxmi Bank lent the highest (212.8% of NPAs), followed by Federal Bank (109.4% of NPAs) and Indusind Bank (105% of NPAs). Among the government-owned bank, IDBI Bank lent the highest (49.4% of NPAs), followed by the Corporation Bank (47.3% of NPAs) and Punjab National Bank (45.9% of NPAs).

Public vs Private

In several ways, the CIBIL database does not reflect the full extent of frauds that the banks might be facing.

For one, it is up to individual banks to declare borrowers to be wilful defaulters or start legal proceeding against them. Such choices continue to be subjective, say bankers, despite the Reserve Bank of India laying down guidelines for banks. Further, banks are not required to file legal suits against all wilful defaulters, which means the reported cases represent a small portion of the alleged frauds that banks might be facing.

Two, not all banks report the details of legal suits filed by them to one credit information company. They might report the suits to different databases at different times. The above trends are based on the data that banks have reported to CIBIL. There are at least three other credit information companies in India.

Despite the limitations of the data, the trends emerging from the CIBIL data raise doubts over the widespread view that public sector banks are more vulnerable to financial malfeasance than private banks. Could fewer loan frauds in their NPAs buttress the view that public sector banks are saddled with higher NPAs, not because they are misgoverned compared to private banks, but because they have a greater exposure to risky sectors of the economy?

“The public sector banks invested in infrastructure projects during the high growth years of 2000s, because the government wanted to give a push to the sector,” said an economist with a leading policy research organisation in Delhi who did not want to be identified. “During the slowdown post 2010, many of these projects became unviable. This turned huge loans into NPAs. This was not the case with the private banks.”

S Nagarajan of the All India Bank Officers Association pointed out the NPAs of public sector banks also jumped after the Supreme Court cancelled coal blocks allocations in 2015. Private banks had limited exposure to the mining sector. “That’s why it is wrong to say that public sector banks’ NPAs are rising because they have more frauds and private banks have less NPAs because they have less frauds,” he said.

Devidas Tuljapulkar, the joint secretary of the All India Bank Employees Association, agreed with this assessment. “Private sector banks are not transparent,” he said. “They have managed to suppress the information because Right to Information Act and the Central Vigilance Commission’s guidelines are not applicable on them. If this is changed, a lot of dirt will come out.”

However, some economists caution against drawing any conclusions from the comparison of legal suits filed by banks with gross NPAs. “Since the stock of public sector bank NPAs is way higher than private sector bank NPAs, the ratios seem distorted,” said Radhika Pandey, a Consultant at the National Institute of Public Finance and Policy.

Arguing that such analysis can neither establish that private banks are more proactive than public banks in recovering loan defaults, nor that they have a higher burden of frauds, she said: “A third inference could be that public banks may have stricter due diligence procedures in place as compared to private banks. By implication, fewer loans are advanced by public banks as compared to small private banks and hence the proportion of defaulters are higher for such private banks.”

All graphics by Anand Katakam.