Need to step up NPA resolution process with acceleration

Source: The Hitavada      Date: 11 Apr 2018 10:44:48


By Sudhakar Atre,

Since last couple of months everyday news channels are flashing news about either bank frauds or loans turning bad and that too running into thousands of crores. The common man is puzzled with the figures. The story behind the bad loans is much complicated and has many angles. This article tries to dissect the issue.

More than 40% of the loans granted by banks to large corporate are classified as non performing assets (NPAs) whereas their share in total advances of banking system is less than 30%. With its huge balance sheet, it is no surprise that 25% of Gross NPA (GNPA) of State Bank of India is from large industry segment. But what is shocking is that more than 40% of GNPA of small banks like Oriental Bank of Commerce, UCO Bank, United Bank of India, Indian Overseas Bank belongs to large industry segment. Among public sector banks, Indian Overseas Bank tops the list with more than 44% of its GNPA belonging to large industries.
The story does not end here. For those who are always up in arms against public sector banks, even the GNPAs of private sector banks are not lesser in this category. To cite an example, more than 50% of GNPAs of Catholic Syrian Bank are to large industries.

The recent revelations about the country’s largest private sector bank may not add solace to lobbyist of privatising public sector banks. Even two foreign banks operating in India are having more than 30% of their GNPAs to large corporate.

Let it be clear that all NPAs are not frauds. Neither any loan turns into NPA overnight. We will have to consider some macroeconomic factors. Our GDP growth rate from 2005 to 2008 was more than 9% against that of 3.84% during 2002-2003. So during that booming period there was tremendous pressure on banks to boost their balance sheet size.

Every bank talked about the doubling of its balance sheet size. The single parameter of judging the banks and performance of their executives was incremental credit.
There were open challenges as to if bank “A” is growing by double digit why not your bank. This lead to indiscriminate lending and the first casualty was proper assessment of credit. Large corporates also went into expansion mode without assessing proper economic viability and fear of left behind. This created the excess capacity.

Most of the credit went to real estate, power, infrastructure, cement, steel, communication, aviation sectors. This was done without developing proper ecosystem so as to develop these sectors making them viable. Real estate prices were inflated.
On Government side, there was total lack of co-ordination. So much so that power plants were financed without assessing feasibility.

All this resulted in slowing down GDP growth rate which reached its bottom at 2012-13 to 4.47%. But the tone was set for bankers. There was a lust for growing faster and become the bigger and the only parameter of growth was increase in loan book without bothering about its sustainability.

The phenomenon was not limited to banks only but everybody had fancy for bigger balance sheets. Unfortunately, the situation is not much changed even today as can be seen from the recent financial community’s enthusiasm in complimenting the particular bank for crossing the Rs 10 lakh crore domestic business achievement as on March 31, 2018 even the probe is going on about the recent LOU fraud in that particular bank.
During that era anybody questioning or applying due diligence was branded as anti establishment. Of course such people were very few as most of the top executives were/are chosen by governments of the day. The phenomenon was visible in numbers.

The total loans of Scheduled Commercial Banks during 2007-08 grew by 25.07% to Rs 24,77,762 crore and during 2008-09 by 20.85% to Rs 29,94,334 crore. But the disease has already set in as more than 40% advances to large corporate had started showing signs of stress in 2008-09.
Then came the brilliant idea of ever greening them either by offering fresh lending to pay the interest and instalments due or restructuring them for maintaining their standard status.

The schemes like Corporate Debt Restructuring, S4A were introduced/implemented to enable them to postpone their debt obligations.
But the things did not stop here and fresh lending was accelerated to keep the issue under carpet. So much so that the total outstanding loans of Scheduled Commercial Banks doubled from Rs 30 lakh crore in 2009 to whopping Rs 60 lakh crore in 2014 whereas gross domestic product (GDP) growth rate declined from 6.72% to 4.72 % during the same period.

Then came up the clean up exercise called as Asset Quality Review Programme in late 2015 and the results were shocking.
The amount of Rs 1.20 lakh crore shown as NPAs of large industries in March 2015 jumped five times at an estimated Rs 6 lakh crore as on March 2018. The data also needs serious attention as large industries constitute approximately 60 per cent of the non performing assets of Scheduled Commercial Banks.

The article does not intend to portray either banks or large industries as villains but intends to peep into history and learn that mistakes should not be repeated again. It also underlines the need of stepping up the NPA resolution process with greater acceleration.

(The author is a freelance writer on banking and may be reached at [email protected])