Money & Banking
Obstinate NPAs That Refuse To Go Away
Non-performing Assets (NPA) are a dynamic statistic, moving from Rs2.50 lakh crore in 2013 to nearly four times in four years! 
 
The corporate debt restructuring (CDR) measures suggested after the 2008 crisis, corrective action plans, Joint Lenders’ Forum (JLF), 5:25 scheme, strategic debt restructuring (SDR), sustainable structuring of stressed assets (S4) have all proved a damp squib. Now the Reserve Bank of India (RBI)-led action, by amendment to the Banking Regulation Act to invoke the provisions of the Insolvency and Bankruptcy Code (IBC) against wilful defaulters, is made to appear as a surgical strike at bad debts.
 
Any credit decision is bounded by certain forecasts or predictions about the future. It is unlikely that every such decision would end up as expected. Hence, NPAs are inevitable in lending. However, credit assessment for corporate entities requires finesse. The promoters and directors should be put to the rigor of scrutiny.
 
Environment and economic risks should be part of enterprise risk assessment. When we look at the largesse in lending to the corporate sector, hindsight and individual appraisal of the directors and promoters as well as monitoring post-disbursement appear to have taken a beating. 
 
The banks, the government owning most of them, and the RBI have been in the know of the problems. After development banks were wound up and universal banking came into being, when banks started selling credit, mutual funds and insurance, and bank-participated rating institutions began rating the companies, credit risk assessment has become farcical. Lenders are aware that they are lending short-term resources for long term investments prone to very high risk of losses. Banks say they were forced to lend to public sector undertakings (PSUs). 
Bank executives eyeing for the top post or those in such high post keen to hold on to their positions, compromised institutional interests. The other reason for such credit for infrastructure, real estate, housing, and retail was arm chair lending, necessitated by staff shortage. They earned profits at the cost of efficiency.  
 
Bank Boards, having government representatives as directors, liberally sanctioned loans. Risk management committees, audit committees of Boards, regular audits and inspection reports at annual intervals should have been the instruments of Board oversight mechanism.  Unfortunately, all these would appear to have been muted. 
 
The CDR mechanism helped in greening the balance sheets of banks. The postponed debt obligations returned with a vengeance to the banks after the CDR ended. Banks realised that they had to provide 30% of the secured portion and 100% of the unsecured for all the doubtful accounts. By the time the CDR ended, banks realised that the tangible securities have all vanished. To save the banks, RBI introduced SDR. 
 
Under SDR, banks can convert 51% of debt into equity to be owned by them and also change the management. New investors could hardly be found, as the amount involved is over Rs2 lakh crore.  Management changes could hardly be seen. In the consortium of bankers, another peculiarity noticeable was that while one bank declared the asset as standard asset, another bank declared it as doubtful, calling for action, due to the former finding ways to push the ghost of NPA under the carpet. 
 
S4 can be termed a non-starter. Unanimity in restructuring effort proved a rarity. On top of this, banks started showing ‘vigilance’ from agencies like the Central Bureau of Investigation (CBI) as villains.  Skeletons in the cupboard of such banks came out and some executive directors and chairpersons were exposed.
 
The latest RBI measure to invoke the IBC and also provide for deep haircuts without fear of the ‘vigilance’ bodies has to prove itself, as the Code requires thorough understanding of the art and science of negotiation and arbitration. Until all the stakeholders, advocates and the jury fully acquaint themselves with the terms used in the IBC, resolution through this process would be a long and difficult journey, given the fact that the banks have not been able to make use of the easier Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act). 
 
It is time for the RBI to step out of the Bank Boards. Regulatory arbitrage shall not take place to preserve the sanctity of the central bank. In more than one way, dynamics of NPAs thus far have defied sensitivities in resolution. Hopefully, the RBI will be able to provide a remedy to the sick five-star hospital patient.
 
(Dr B Yerram Raju is a risk management specialist and a former senior executive of SBI.) 
 

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COMMENTS

Ramesh Jaradhara

5 months ago

What we learn from all said and done is that the infection in the banking system is so deep that a surgery is seems impossible at this juncture. A medication with an Indian mentality will not bear any fruit. IBC could be effective medicine at this moment. But chances are that resistance may develop against this too. Where corruption is a normal rule, an exception to this would be an exception.

Ashok m Rane

5 months ago

In this article it is stated that the Top Bank Executives ( Board Members- CMDs/EDs/CEOs)I would say that NPAs are essentially a product of the unholy nexus between corrupt Bank executives and their political-cum-bureaucratic (i.e., the IAS) bosses (and also with the support of the CVC/CBI). it is clear that High Value Loans r sanctioned under pressure or taing into consideration some hidden interests. This is possible only because as they are Presidential Appointees, they are free of criminal action, they r not accountable for their misdeeds, or they r deliberately kept like that to help Top Politicians.They r also out of purview of Vigilance. It is d root cause of growing NPA, large scale writing off of Bank Loans etc. In this context the 39th Report of Standing Committee on Finance submitted to the Parliament is very important. The Report has been submitted by the Standing Committee under the Chairmanship of Dr. M. Veerappa Moily, MP, on 1st December, 2016.The Committee as per its recommendation No. 2 has strongly recommended that "Accountability of nominee Directors of RBI /
Ministry on the Bank Boards as well as the CMDs / MDs of banks should also be fixed
in the matter.." The Parliament has been made aware for the need for fixing accountability of Bank Heads for controlling NPA menace. Hope, the Govt. accepts the recommendations and brings legislation so that the NPAs r controlled.

A BANERJEE

5 months ago

“Banks say they were forced to lend to public sector undertakings (PSUs).
Bank executives eyeing for the top post or those in such high post keen to hold on to their positions, compromised institutional interests....
Bank Boards, having government representatives as directors, liberally sanctioned loans. Risk management committees, audit committees of Boards, regular audits and inspection reports at annual intervals should have been the instruments of Board oversight mechanism. Unfortunately, all these would appear to have been muted.”
How rightly put by the author.
From my experience of thirty-five years in the Indian Revenue Service, mostly investigating tax evasion cases inter alias of corrupt officials, and also as Director (Fin) in a very important economic ministry, I would say that NPAs are essentially a product of the unholy nexus between corrupt Bank executives and their political-cum-bureaucratic (i.e., the IAS) bosses (and also with the support of the CVC/CBI).
In a large number of cases of fly-by-night investment companies with fake and bogus shareholders that were floated in the early eighties, the complicity and connivance of bank officials were unearthed by us. There is no doubt that, if the top management were not greedy and pliable, and they themselves were honest, the banks would not have been saddled with this huge problem of unrecoverable NPAs.
This is like the ever mounting problem of recovering the outstanding taxes over the years, also due to the connivance of the political and bureaucratic bosses of the corrupt tax authorities.

Provisioning for large NPAs not to impact earnings: SBI
Lending major SBI on Tuesday said it may have to make a little more provisioning towards large NPA (non-performing asset) accounts referred by the RBI for resolution and that this should not "badly impact" earnings.
 
According to State bank of India (SBI) Chairman Arundhati Bhattacharya, "pretty large provisions" have already been made for these accounts.
 
Bhattacharya said this after the bank's annual general meeting (AGM) that concluded here on Tuesday. She was responding to a question about a possible increase in provisioning for the 12 large NPA accounts. 
 
Recently, the Reserve Bank of India (RBI) referred 12 large NPAs in the banking system for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC). 
 
On Monday, credit ratings agency Crisil said that the lenders might need to raise provisioning to deal with large stressed assets.
 
"Based on Crisil's assessment of embedded value in the top 50 NPA (non-performing asset) cases, we estimate a 60 per cent haircut would be needed on these loan assets," said Krishnan Sitaraman, Senior Director, Crisil Ratings.
 
"That would mean that banks will have to increase provisioning by another 25 per cent this fiscal, compared with nine per cent in the last."
 
As per Crisil's study, banks have already provisioned 40 per cent for these 12 large NPAs worth Rs 2 lakh crore before the RBI move.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Banking Ombudsman to look into complaints of mis-selling by banks
The Reserve Bank of India (RBI) said, its Banking Ombudsman Scheme would now include, deficiencies arising out of sale of insurance, mutual fund or other third party investment products by banks as well as complaints regarding mobile banking and electronic banking service in the country.
 
In a notification, RBI says, "The pecuniary jurisdiction of the Banking Ombudsman to pass an Award has been increased to Rs20 lakh from existing Rs10 lakh. Compensation not exceeding rupees hundred thousand can also be awarded by the Banking Ombudsman to the complainant for loss of time, expenses incurred as also, harassment and mental anguish suffered by the complainant."
 
RBI has also revised procedure for complaints settled by agreement under the BO Scheme. Another important change is a customer can now file an appeal for complaints closed under Clause 13 (c) of the existing Scheme relating to rejection, which was not available earlier.

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