Once more, the Confederation of Indian Industry (CII), India's most aggressive industry association, has backtracked on some of its own economic policy recommendations. In a drama that borders on the comic, a CII-sponsored "National Task Force" prepared a report on the non-performing assets of India's banking system, which was submitted to the government. In doing so, the CII, whose members are clients of the banks and include defaulters who affect bank performance by their own deeds, had conveniently ignored the fact that the organisation or its sponsored bodies can hardly be an independent and dispassionate evaluator of bank health and bank restructuring.
 
Despite the fact that an evaluation of bank performance should hardly be the brief of an association of lobbyists for India's manufacturing interests, the report was received with much fanfare by Finance Minister Yashwant Sinha. In the days that followed, crucial recommendations of the report, including one that three weak banks (Indian Bank, UCO Bank, and United Bank of India) should be closed down, and four strong ones (State Bank of India, Corporation Bank, Oriental Bank of Commerce and Bank of Baroda) should be privatised to the extent of 75 per cent of their equity, were deliberately or otherwise leaked to the press. The CII's report, it appeared, was to provide the trigger for a big push with regard to banking reform.
 
The government's effort at bank restructuring, which has been underway for quite a few years now, has stalled in the face of the huge burden of non-performing assets (NPAs). NPAs are loans on which borrowers do not service their loans on the dates on which they are due. As per the guidelines issued by the RBI in 1995, an asset would become an NPA if interest remained unpaid for 30 days beyond the due date, for a period of two quarters. This involved a change from the earlier definition which allowed for a period of four quarters. Since, banks are required now to make a provision of 10 per cent of the balance due when a loan becomes an NPA, 'net NPAs' are far less than 'gross NPAs'. Quite recently, gross NPA's in India's banks were estimated to vary between 15 and 35 per cent.
 
According to the latest Report on Currency and Finance released by the Reserve Bank of India, gross NPAs of public sector banks have risen three-fold between the end of March 1993 and the end of March 1999, from Rs. 392,500 crore to Rs. 517,000 crore. One reason for this sharp increase in NPAs at a time when banks have increasingly resorted to restructuring plans and exercised caution in lending is the problem of "wilful defaults". These are defaults on interest and amortisation payments by managements of units with adequate cash flow and sound net worth; which have siphoned off funds from the defaulting units or which have not purchased or have sold capital equipment specifically financed with particular loans. Faced with this problem the Reserve Bank of India had under instructions of the Central Vigilance Commission, launched a scheme to require banks to submit details of wilful defaulters of sums exceeding Rs.25 lakh and above starting April 1, 1999.
 
Such defaults occur because the legal system does not ensure speedy recovery of dues. As a result, experts have been recommending schemes such as exchange of information between banks (which cuts off access to further credit) and public declaration of defaulter identities to curb the growing practice. On the ground, banks driven by the need to window-dress their NPA figures have provided new credit to defaulters to help them repay past dues.
 
Needless to say, it is the corporate sector in general and the bigger units within it which are in a position to resort to such practices and go scot-free. Prudence would demand that responsible corporate interests should try and keep the issue from turning controversial and help enforce greater discipline among corporate borrowers. Surprisingly, the CII has instead chosen to use this issue to not merely close some banks and their books, but also as the reason to permit the corporate sector to buy into the successful segments of the nationalised banking system. With the CII's own members being culpable by having defaulted on bank loans, the demand for closure of three weak public sector banks, is liable to be interpreted as means of writing off debt which they were still liable for.
 
It appears that the CII's recently acquired arrogance had led it to ignore the fact that recommendations that threaten the livelihoods of thousands of bank employees, were bound to trigger controversy. Associations of bank employees across the country strongly protested and threatened to reveal the names of such defaulters. For example, the All India Bank Employees Association, alleging that key members of the CII-sponsored task force owed the nationalised banks Rs. 1,000 crore, declared in a statement that: "If the CII (Confederation of Indian Industry) report on non- performing assets (NPAs) is not withdrawn within a week, the bank unions are bound to defy the secrecy clause of the industry and release the list of defaulters so that the public would judge who is responsible for the present ills of the banking industry." Soon thereafter, the AIBEA came out with the names and details of defaulting accounts of companies which were either promoted by members of the CII Task Force, or those in which they are directors. The AIBEA press release held that out of the total bad loans of Rs. 58,000 crore, the private sector accounts for Rs. 30,000 crore, of which roughly Rs. 25,000 crore is due from CII members.
 
The unions were joined in protest by officials of the targeted banks. According to reports, senior managers of one of these banks argued: "Several so-called doctors these days have emerged on the scene with a variety of prescriptions. Unfortunately, these self-styled medical practitioners, instead of doing what their profession demands - try to help an ailing person come round - are actually recommending drastic surgery; as if chopping off the head is the best cure for headaches." Rather than indulge in such an exercise, they argued, "the Confederation of Indian Industry (CII) should exclude defaulters of bank loans from its membership."