Private banks have threatened to stop Auto Loan

Private Banks have rightly told that they will stop financing loan for private and commercial vehicles if RBI fails to issue clear guidelines enabling banks to take repossession of vehicles where borrowers default in repayment.

Private Banks are worried about their capital, profitability of their bank and their ultimate survival and this is why thought it fit to stop lending for vehicles than to bear the risk of assets going bad and weeping for having no weapon in the hands of banks to recover the money from recalcitrant and willful defaulters. On the other hand Public Sector Banks (PSB) are least bothered of loss of asset, profitability of banks, growing level of bad assets, and growing number of willful defaulters in want of proper and effective legal safeguards and overall ill health of the bank and hence they continue to indulge in auto lending despite increasing number of defaults. To add fuel to fire SBI has no reduced lending rate to 8% for one year for purchase of vehicle.

PSB can afford to be careless because they are public servants whereas officers in Private Banks perform as owner of the bank. PSBs know very well that whenever any PSB become sick due to wrong policies or wrong implementation of policies or dirty politics, government does not hesitate to provide capital to such ailing banks. During last two decades of reformation government has infused thousands of crores of rupees in PSBs and at the same time forced PSBs to sacrifice or waive loan worth at least one lac crore of rupees.

It is wise and prudent for CMD of PSB to become yes-man and flatterer of FM than to worry about ill health of bank and invite sickness in his personal life. This is why they bother only what Finance Minister tells or advises to banks during meetings.. CMD's of PSB compete with each other in obeying the instruction of FM.

It is therefore wrong and foolish to say or conclude that since the financial health of PSB is better they have not stopped auto loans. As a matter of fact health of Private Banks is far better than that of PSB and this is why they have grown so rapidly that their business has surpassed that of many PSBs which are more than 50 years old banks. Even public image of private banks is better and this is why share prices of private banks is valued higher. PE ratio (which is considered as indicator of market evaluation of any company) of PSB is less than four whereas that of private banks is more than 10.

Another indicator of ill health is said to be NPA ratio. If Net NPA ratio is less than one, the bank is considered as healthy. Now-a -days all banks are showing net NPA less than one, as if all Indian borrowers are sincere and honest in repayment of loan they take. Here also private banks show the real NPA whereas PSBs know the art of hiding real NPA and hence they also reflect net NPA ratio as less than one. It is ICICI bank which dared to admit that there was 25% rise in NPA in auto loan last year and they have taken corrective steps to safeguard their capital. On the contrary PSB conceal bad accounts and need not bother for recovery or taking corrective steps. For them it is easier to restructure the loan and postpone the corrective steps for future generation.

It is difficult to distinguish between bad and good bank where figures in balance sheets are cooked, concocted, fabricated and manipulated as per whims of CMD of PSBs. As long as team of Chartered Accountants work in the same fashion as they did in Satyam Computers, one cannot assess the factual position from Balance Sheet of any bank particularly that of PSBs. It can be said with firmness now that Balance Sheet is no more a mirror of business of any company.

As a matter of fact Private Banks have realized during decade old experience that case of default has been increasing sharply due to some restriction imposed by RBI and Government of India on seizure of vehicles from defaulters in concurrence with a few judgments pronounced by Apex Court in this regard. Borrowers as a result are not afraid of any punitive action even if they willfully stop repayment of loan they take from banks. So far as PSBs are concerned , borrowers of all kind ( auto loanee or house loanee or business loanee ) are very much sure that they banks officers can be manage by gifts and cash incentives even if they do not repay the loan in time and ultimately they can manage waiver or loan or compromise settlement.

To conclude it can be said that CMD of {Private Banks has to worry about actual health of their own bank whereas CMD of PSB has to keep FM and RBI Governor happy so that their own future may be brighter. Real exposure will take place only if asset classifications of top three banks are thoroughly checked.

And so far as lending to any sector is concerned, it cannot grow until government is serious and sincere for recovery of loan from those who fail to repay their dues as per contractual terms to bank.
No politics and no sympathy is needed for person who defaults in keeping commitment until there is natural calamity or until the situation goes beyond the control of the borrower. Non repayment of loan is a crime and the criminal must be punished in all sphere of life to maintain social discipline. Obviously demand of private banks for clear guideline for repossession of vehicles from defaulting borrowers is completely justified.

Danendra Jain
28th June 2009