Non-Performing Assets of Banks: Turning a Blind Eye Won’t Help

Will some sort of stringent penal action help banks deal with bad loans better, asks Gautam Mukherjee.

The non-performing assets (NPA) mess in the Indian banking system is the politically incorrect equivalent of “wham-bam-thank-you-ma’am”. It is the metaphorical nine-months-later consequence of ‘take the money and run’.

The statistics in themselves present an alarming picture: Rs 1.14 lakh crore written off over the last three years by 29 PSU banks. Rs 732,000 crore out on loan to just 10 leading companies, with a realistic threat of up to 25% of this going bad.

The total stressed asset class is hovering at about 15% of the loan book, emanating from a Rs. 115 lakh crore odd Indian banking sector. And 70% of this banking business is conducted by the public sector.

Turning a Blind Eye to the Problem

You can blame the defaulting borrowers, or the economic slowdown, or attribute it to a superior power, the force majeure. Another problem is that of trying to take advantage of the banker’s reluctance to declare a loan as an NPA.

There are processes which can be deployed for instance asking the question whether the loans are a year old, or two. Has the bank tried to recover the loan? But if it is designated an NPA, then the banks must provision for it at 100% of value, from its free and clear resources. This puts pressure on their balance sheets and the profits.

Instead, quite often, both sides agree to kick the can down the road, deciding to restructure the loan instead. When they do this, the lending banks need provision, or set aside from their own free resources, only 5% of the loan outstanding.

The Situation is Pretty Dangerous!

A series of PSU banks, not just the hot potato, which includes the Dena Bank and Punjab National Bank, but even the Indian Overseas Bank, and the United Bank of India-all have stressed assets of over 10%. Other PSU banks have over 5% NPA ratios. This is above the danger mark, clogging up the works, and choking its spigots of lending.

Still, the banking sector is growing, and is slated to more than double to Rs. 288 -300 lakh crore, by 2020. The government is kicking in Rs. 70,000 crore to refinance some of the banks presently, with Rs. 25,000 crore going in FY17.

But, if the sector truly cleans up its act at the insistence of the RBI, it will be in a position to sell off significantly to the private sector, and expect better practices as a consequence; with less political patronage lending and gamesmanship too.

Penalising Defaulting Debtors

But the reason for the NPA mess is also partially due to an over-burdened and tardy legal system that favours, by default, those who want to block proceedings, and not be brought to book. And the general lack of effective remedial mechanisms, plus the existence of loop holes and blind spots in the law.

Whatever there is on the ground, such as the Debt Recovery Tribunals (DRTs) and the 2002 Sarfaesi Act, (Securitisation & reconstruction of financial assets & enforcement of security interest), have a plethora of procedural ifs and buts built in, and even these are swamped with case overloads and cross-litigation, not enough judges to hear the cases, etc.

There are no ‘bad banks’ or Asset Recovery Companies (ARCs) yet, though the finance ministry, the RBI, and Niti Aayog are working on it.

There is nothing on the statutes to penalise sloppy or even dodgy lending, which is hard to prove anyway, and no method to throw the defaulting debtors, into, say, Victorian style debtors’ prison.

And even in instances when the Sarfaesi Act, 2002 has been enthusiastically applied, the left-leaning courts have taken a stand for the borrowers rather than the lenders!

Is Bankruptcy Law the Answer?

So, no harsh ‘debtors prison’ in India even if the banks are going broke. And no legitimate way to emotionally scar ‘wilful defaulters’, as the young Charles Dickens was. He was haunted by it, thrown in, en famille, with his debt-ridden father.

Meanwhile, in India, the most brazenly lurid ‘wilful defaulter’ of them all parties and splurges on, regardless of the RBI governor castigating him, almost by name, from his ‘fiscal probity’ pulpit.

The new bankruptcy law, which would have given creditors some muscle to deal with defaulters and their assets at last, is still pending in parliament. Will it be passed in the upcoming budget session? Maybe, but the last two parliamentary sessions were near washouts, so it is difficult to expect too much.

(Gautam Mukherjee is a plugged-in commentator and instant analyser.)