The NPA Mess

The NPA Mess

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

The statistics are an equal parts cocktail of alarming and scandalous: Rs1.14 lakh crores written off over the last three years by 29 PSU banks. Rs. 732,000 crores 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.

But now lending is going easier to control, and smaller, to retail, and corporates are left high and dry.

You can blame the defaulting borrowers, or the economic slowdown, or  the act of god Latin of force majeure.  Then there is the taking advantage of  the banker’s reluctance to declare a loan as an NPA .

There are processes. Is it 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, or worse.

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.

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

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

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 2002 Sarfaesi Act  has been enthusiastically applied, the left-leaning courts have taken up for the borrowers rather than the lenders!

So, no harsh debtors prison in softly-softly 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. Oliver Twist and the procession of impoverished Dickensian characters may never have been born.

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 budget session coming up? Maybe, but the last two parliamentary sessions were near washouts, so it is difficult to expect too much.

For: The Quint

(746 words)

February 10^th, 2016

Gautam Mukherjee