Events & Issues

New Delhi, 24 November 2014

Rising NPAs of Banks

INITIATE RECOVERY PROCESS

By Dhurjati Mukherjee

The non-performing assets (NPAs) of banks have become a major problem for the government and the country. According to the Finance Minister, as of March end bad loans stood at Rs 245,809 crores compared to Rs 183,854 crores in 2012-13 and Rs 137,102 crores in 2011-12. Financial  advisory, Alvarez & Marsal, found that as of September 2013, gross NPAs were Rs 230,000 crores and restructured loans Rs 400,000 crores adding up the Rs 630,000 crores (100 billion) constituted as much as 10.2 per cent of advances.

Recently some banks reported higher NPAs for the July-September quarter, which include Bank of Baroda, Syndicate Bank, UCO Bank and many others. Senior bank chiefs feel that the growth in bad loans may continue into the next year, thereby requiring more capital to act as buffer against the losses from the loans and all these are eating into the profitability of banks.

The Reserve Bank of India former Deputy Governor K C Chakrabarty had stated (at the annual bankers’ conference) that banks had sacrificed around Rs one lakh crore by writing off bad loans to corporates which is much higher than Chidambaram’s farm loan waiver in 2008. The farm loan waiver, which was criticized by pro-industry analysts, was only around Rs 60,000 crores. As Chakrabarty informed: “In the last 13 years, banks have written off Rs 1 lakh crore and 95 per cent of these are bad loans. Everyone talks of the farm loan write-off but it is the medium and large enterprises segment that has a 50 per cent share in NPAs.”      

The RBI official regretted the increasing NPAs of banks and the technical write-offs resorted to by banks. “Restructuring of loans with retrospective effect has credit quality in banks”, Chakrabarty observed. It may be mentioned here that as per RBI sources, banks added Rs 4.95 lakh crores in their bad debts between 2007 and 2013.     

During the same period, they reduced NPAs to the extent of Rs 3.50 lakh crores. This was mainly because loans worth Rs 1.40 lakh crores were written off while another Rs 90,887 crores were upgraded to repaying loans status and Rs 1.18 lakh crores were recovered.     

Statistics reveal that the United Bank of India (UBI) has an NPA of over 7 per cent while the State Bank of India has 5 per cent bad assets. But though the minister said the RBI and the Government had taken serious note of the issue, no specific measure towards aggressive recovery was enumerated by him. It is, however, understood that the Government is considering to do something to tackle the NPAs which totals around Rs 1.70 lakh crores presently.

It is quite apparent that India has been alarmed by the rise in soured loans, specially of the State lenders (nationalized banks) that dominate the banking system. Tackling the problem of willful defaults is difficult in a country that lacks a bankruptcy law and has notoriously clogged courts where justice takes a very long time.      

Stressed loans of banks are estimated to be at least 10 per cent of all loans. Fitch Ratings expects this to rise to 15 per cent by March 2016 (or within another two years). The bad loan ratio of 5 per cent for State banks is more than double that of private sector lenders.           

Let us take the case of Kingfisher Airlines, which has closed down for quite some time now. The controlling shareholder, Vijay Mallya, a liquor baron and an enormously rich person with a flamboyant life style, has after much pressure been named a willful defaulter by his bankers. Mallya was unsuccessful in his efforts to revive the airlines and find new investors but he openly said that it is the Company and not him personally that owes the money to the banks.    

It is generally agreed that Mallya was not interested to revive the airlines as he had borrowed an extraordinarily high amount from the nationalized banks, specially State Bank of India. The question then remains that what action has been taken by the banks to recover the amount. Why were the loans sanctioned without a proper mortgage of his huge assets?        

There are also cases of corruption of high officials that lead to increasing NPAs. The arrest of Bhusan Steel Vice Chairman and that of Chairman & Managing Director of Syndicate Bank over an alleged bribe of Rs 50 lakh for favour doled out to the steelmaker is again a pointer to the fact that the private sector  is grabbing whatever it can, legally or illegally. Did Prakash Industries allegedly pay a bribe of Rs 3.5 crores to the CMD of Syndicate Bank? There are numerous other such cases in the banking sector but very rarely such high-ups are caught and public money is allowed to be squandered for the benefit of the industrial class.  

The RBI had put an exposure limit for a single borrower to 25 per cent of a bank’s capital; for a group, exposure at 55 per cent. The Financial Sector Assessment Programme (FSAP) for India (2011-12) by the International Monetary fund and the World Bank deemed the country to be “materially non-compliant” vis-à-vis Basel core principle related to large exposure limits.

The FSAP report stated that a large exposure limit of say 40 per cent “is significantly higher than the large exposure limit of 25 per cent, which is considered good international practice . . . . this limit has the potential to allow the default of one particular consolidated borrower to cause a serious loss of capital in a banking company”.     

Keeping in view the fact of adhering to the regulations of Basel-III norms and the fact that the State-run banks can no longer be funded by the Centre in the manner it was done earlier, it is imperative that banks have to be more cautious and even shrug off political pressure while sanctioning loans. However, at times, banks have little to do. Power sector loans to electricity boards remain idle due to poor fuel linkages or transmission leakages and these need to be resolved by policy makers. In addition, road and highway projects get delayed due to non-availability of land or other factors.            

Thus, while lending to the deserving cannot be discouraged as enterprises need to grow – and help in industrial revival and rejuvenation – the banks would also have to be judicious in ensuring that the money be returned. The recovery process has to be strengthened and a fast mechanism evolved for which the RBI and the finance ministry have a big role to play. In addition, there is need to publish the names of big corporate lenders in the annual reports of banks and strict measures taken to mortgage their property to pay off their debts. ---INFA      

(Copyright, India News and Feature Alliance)