Recapitalisation is an opportunity for banks to make better environmental and social investments

Source: Scroll.in

Indian banks should have safeguard policies of the kind followed by international financial institutions.

Joe Athialy

Despite the crisis in several parts of India following demonetisation, which sucked out 86% of the currency in circulation overnight, one of its obvious outcomes is the recapitalisation of banks.

Last week, the Reserve Bank of India announced that old Rs 500 and Rs 1,000 notes worth almost Rs 11.85 lakh crores had been deposited into banks since November 8, when the demonetisation policy was announced.

The government seems to have grand plans for this corpus. Last month, Finance Minister Arun Jaitley said the inflow of funds into banks had strengthened their ability to lend.

Jaitley was quoted in the media as saying:

“Suddenly the banks are now flush with funds coming into the banking system and these are low-cost funds. So these low-cost funds are going to be lent at a much lower rate.”

Additionally, if the hike in the Cash Reserve Ratio – the amount of cash banks have to keep with the Reserve Bank of India, which they cannot use and for which they are not paid interest – announced by the central bank on November 26, with the intention to absorb the extra liquidity created, was continued, banks would not have been able to lend. However, the hike was withdrawn on Wednesday .

And herein lies the worry.

Indian banks are plagued by huge non-performing assets, which curtails their ability to further lend money. But at a time when neither the government nor banks have taken adequate steps to tackle this problem, there are two questions that arise.

One, is it right for banks to lend large amounts of money they have received unexpectedly – the savings and emergency funds that millions of Indians have virtually been forced to deposit into their accounts – without first taking any concrete steps to recover old bad loans, prosecute wilful defaulters or even prevent bad loans from growing further?

Two, shouldn’t banks have safeguards to ensure that no harm is done to people or the environment when they invest this huge amount of money? And shouldn’t banks ensure that adequate mitigation measures are in place for extreme cases of displacement or damage due to such investment?

While the issue of growing non-performing assets of banks can be tackled if the government has the will to do so, the second issue can be ensured with strong safeguard policies – guidelines for banks to support inclusive growth and environmental sustainability – and mechanisms to ensure their implementation.

Non-performing assets

As of June 2016, the gross non-performing assets of public and private sector banks in India stood at Rs 6 lakh crores, according to data shared by the Ministry of Finance in Parliament in November. A detailed analysis of this data by The Hindu said that the top 20 non-performing assets accounts of public sector banks amounted to Rs 1.54 lakh crores.

In absolute terms, the State Bank of India has the highest value of gross non-performing assets. In its second quarter ending in September, the bank saw a dip of 35% in its net profit due to increasing bad loans which grew sharply from Rs 56,834 crores a year ago to Rs 1,05,782 crores.

While the Reserve Bank of India was reluctant to make public the names of wilful defaulters who owe Rs 500 crores or more to banks despite the Supreme Court wanting it to do so, the All India Bank Employees’ Association published lists of public sector banks with their non-performing assets, and of wilful defaulters in July.

Notwithstanding the public outcry on non-performing assets, not only has the government failed to act to prevent cases of non-performing assets in the future, banks are also showing no signs of being able to curb the rise in bad loans.

Most banks have reported an increase in non-performing assets – in some cases the figure has doubled in a year, as seen in the State Bank of India. While the recovery of bad loans is a far cry, no action has been taken against willful defaulters.

It is in this context that we must look at the Rs 11.85 lakh crores that have been deposited in banks, which they are ostensibly going to lend out in the coming months.

Safeguard policies

Following the demonetisation bonanza for banks, if the government or banks show no will to recover bad loans, non-performing assets will continue to grow.

But beyond the possible further growth of bad loans, a huge social and environmental catastrophe will be in the making if the banks start unbridled lending.

This is where safeguard policies, which are in place in major international lending institutions, come in.

According to the World Bank, the objective of its safeguards policies is “to prevent and mitigate undue harm to people and their environment in the development process”.

The World Bank developed policies to safeguard people and the environment froom the 1980s. Though it approved a new set of safeguard policies in August, many feel that the international finance institution “missed [an] opportunity to raise the bar”.

The Asian Development Bank, a regional development organisation, views its safeguard policies as “a cornerstone of its support to inclusive economic growth and environmental sustainability in Asia and Pacific.”

Such mandatory policies are also found in other multilateral development banks such as the European Bank for Reconstruction and Development. The Asia Infrastructure Investment Bank, which started business in January, of which India is the second-highest shareholder, has already published a draft Environmental and Social Framework.

The World Bank’s private sector arm, the International Finance Corporation, too has similar safeguard policies, called performance standards, violation of which could be reported to the body’s compliance mechanism.

The Equator Principles are, on the other hand, voluntary guidelines for financial institutions. Among the 85 financial institutions from 35 countries that have adopted these principles, only one, Infrastructure Development Finance Company, is from India. In fact, the Infrastructure Development Finance Company is probably the only banking or non-banking institution in India that has any such social or environmental policies.

While institutions like World Bank Group and Asian Development Bank have had problems in implementing their safeguard policies, which have been raised by local communities time and again, these institutions can be held accountable for violations of their policies. A case filed by local fishing communities in Gujarat in a US court against the International Finance Corporation’s investment in the Tata Mundra power project is one such instance.

What about India?

However, despite investing large sums of money in high-risk sectors, Indian banks are seldom held accountable in the absence of safeguard policies.

The idea behind all such policies is that the money these banks use to lend money for projects comes from the tax-paying public. This puts the onus on the banks to ensure that their investments do not cause harm to the people and environment.

In that case, shouldn’t Indian banks have similar safeguard policies as well?

It is not just banks, even the insurance behemoth, the Life Insurance Corporation of India, plans to invest Rs 2.7 lakh crores this financial year alone in different sectors. Though its corpus is not a direct fall-out of demonetisation, this is a massive sum of money. Compare this to investments by the World Bank and the Asian Development Bank. The World Bank’s highest investment commitment for a year in recent times was Rs 34,000 crores in 2014. Its lending commitment is Rs 25,000 crores this year. Similarly, Asian Development Bank’s commitment for 2015 was Rs 17,000 crores.

Thus, shouldn’t the financial institutions – both banking as well as non-banking – of India also have safeguard policies in place?

The sudden surge in the capital of Indian banks due to demonetisation is yet another reason why systems and policies to safeguard the money and rights of the people and our environment need to be put in place with adequate consultations with all parties involved. This will ensure responsible banking. Or else we would be witnessing the creation of more non-performing assets, violation of human rights and irrevocable damage to environment not too far from now.

Joe Athialy works with the Centre for Financial Accountability.

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