Bank NPAs

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Facts:
  • NPA of commercial banks have increased by around 4% in the last one year
  • NPA in Dec 2017 is 10.41%
What is NPA as per RBI?
Non-Performing assets in respect to banks are defined as the loans on which interest or principle is not being paid for 90 days.
However, in terms of Agriculture / Farm Loans; the NPA is defined as under:
  • For short duration crop if the loan (instalment / interest) is not paid for 2 crop seasons it would be termed as a NPA.
  • For Long Duration Crops, the above would be 1 Crop season from the due date
Why NPA has increased?
  • Banks caused a bubble, failed to do due diligence and lent more than what was warranted to developers – lent higher amount than the cost of project assessed by NHAI
  • In the wake of 2008 economic crisis, government resorted to fiscal stimulus which led to easy supply of money. This caused increased lending without doing due diligence. It resulted in over leveraged firms. As economy slowed down after 2012 and demand slumped, companies were not able to utilise the extra capacity they had created earlier. They could not sell -> profit decreased -> led to NPA
  • The problem which was largely hidden earlier as Banks used to do window dressing of their account statement has now come to the forefront after Rajan exhorted the banks to clean up their asset books by March 2017
Current status:
Recently, NPA has reduced by 28% due to government’s initiatives
What are key six reasons for stressed assets?
  • Domestic and global economic slowdown,
  • Delays in statutory and other approvals especially for projects under implementation
  • Aggressive lending practices during upturn as evidenced from high corporate leverage.
  • Laxity in credit risk appraisal
  • Loan monitoring in banks
  • Lack of appraising skills for projects that need specialised skills resulting in acceptance of inflated cost and aggressive projections.
Other reasons
  • Wilful default
  • Loan frauds
  • Corruption
Impact of NPAs on Banks:
  1. Banks have to keep aside cash to provide cover for these loans. This reduces their capacity to give more loans and thus hampers their growth.
  2. Bessel norms requires stringent Capital Adequacy Ratio which increases burden on banks
  3. For economy, it is disadvantageous as banks become more circumspect in giving loans which affect the credit offtake in economy. India is still an economy which is largely dependent on banks to raise capital as the bond market is not that well developed. This leads to declining Gross Capital Formation affecting economic growth.
  4. Rising of NPAs will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will shoot up. Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
  5. It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a loan.
  6. This will hurt the overall demand in the Indian economy which will lead to lower growth rates and of course higher inflation because of the higher cost of capital.
  7. The trend may continue in a vicious circle and deepen the crisis.
What are the traditional ways to tackle NPAs?
  1. Appointment of nodal officers in banks for recovery at their head office, zonal office
  2. Thrust on recovery of loss assets by banks
  3. Close watch on NPA by picking up early warning signals and ensuring corrective action
  4. Directing state level bankers to be more proactive in resolving issues with state govt
  5. Designating ARC as resolution agent of banks
What are the legal provisions related to recovery of NPAs?
  • SARFAESI – The Act empowers Banks/ Financial Institutions to recover their NPAs without the intervention of the court, through acquiring and disposing secured assets without the intervention of the court in case of outstanding amounts greater than 1 lakh. SARFAESI, it is accused, has been used only against the small borrowers primarily from MSME sector
  • Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act provides setting up of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for expeditious and exclusive disposal of suits filed by banks / FIs for recovery of their dues in NPA accounts with outstanding amount of Rs. 10 lac and above. DRTs are overburdened leading to slow disposal of cases
  • Lok Adalats:  Section 89 of the Civil Procedure Code provides resolution of disputes through ADR methods such as Arbitration, Conciliation, Lok Adalats and Mediation. Lok Adalat mechanism offers expeditious, in-expensive and mutually acceptable way of settlement of dispute
  • Under banking regulation act 1949, RBI is empowered to monitor the asset quality of banks by inspecting record books
What RBI has suggested?
  • RBI has directed banks to give loans by looking at CIBIL score and is encouraging banks to start sharing information amongst themselves. This is to deal with cases of information asymmetry. RBI has directed banks to report to Central Repository of Information on Large Credit (CRILC) when principle/interest payment not paid between 61-90 days
  • RBI has asked banks to conduct sector wise/activity wise analysis of NPA
  • Strategic Debt Restructuring Scheme : This scheme provides for an alternative to restructuring. Wherever restructuring has not helped, banks can convert existing loans into equity.
  • RBI has allowed banks to sell stressed assets to other banks/NBFCs. Till now, only ARCs could buy such assets. This will lead to better price discovery.
What are the steps taken by government?
  • Government has announced recapitalization of the bank to the tune of 70000crore. However, given the situation, this amount is grossly inadequate
  • Finance Minister has recently mentioned setting up of stressed asset fund in association with banks that can provide equity or debt capital
It is warned that the non-performing asset (NPA) problems of the Indian banking system might pose a serious crisis to the sector. Critically examine why NPA has become a problem, their effect on the economy and steps needed to address this issue. (200 Words)
Non-Performing assets in respect to banks are defined as the loans that are in jeopardy of default i.e. loans on which interest or principle is not being paid for 90 days. In recent years volume of NPAs have increased considerably and stands out to be around 5% in the present perspective which is a matter of concern.
Reasons for this includes:
  1. Excessive lending by banks owing to various reasons like meeting the targets of priority sector lending, governmental pressure to push financial inclusion. Around half to the NPAs are in priority sector. Further unseasonal rains and other natural adversities impacting the agricultural sector have also added to the woes of NPAs.
  2. Large number of stalled projects and the problem in PPP mode infrastructure projects have increased the problems for banks who have given loans heavily for such projects.
  3. Willful defaulters like Kingfisher also results in increase in NPAs for banks.
  4. Lack of accountability in NPAs and poor professionalism. Poor governance in public sector banks as compared to private banks have also resulted in higher share of NPAs in PSB as cited by PJ Nayak committee report
Effect on economy:
Increase in NPAs results in less disposable money with banks other than impacting their balance sheets. This puts pressure on banks to reduce their lending and as a result its adverse impact is being seen in pace of development, financial inclusion, loans to priority sector impacting poorer people. This puts pressure on Government of not only infusing capital to distressed banks but also increasing the pace of development putting pressure on its fiscal expenditure. In nutshell NPAs disturbs the whole economic cycle and  impacts everyone.
Steps needed to address it:
  1. Early detection of signs of distress and taking coercive steps well in advance as directed by RBI
  2. Improving upon the loan recovery methods by strengthening debt recovery tribunal and debt recovery appellate tribunal.
  3. Better implementation of SARFAESI Act, 2002
  4. Improved governance in banks, better administration over loans given by banks.
  5. Develop long-term bond market in India. This will ease banks to concentrate their energy in other sectors. Recently, in budget government has proposed to raise long term debt of the order of 20,000 crore per year by IFCI to fund these projects. (National infrastructure fund)
  6. Encouraging asset reconstruction companies to improve balance sheets of banks.
  7. Curb on populist measures of waiving off the loans for farmers else trend should be changed to providing cash benefits from contingency funds.
  8. Plug and Play model for auctioning the projects only after availing all the required clearances
  9. Cash infusion into banks, to strengthen their financial status which can help them to lower their interest rate, thus balancing the debt : equity ratio.
Reckless lending by public sector banks has been blamed as one of the reasons why certain rich individuals have misused large funds and have become wilful defaulters. Is it an instance of crony capitalism? How should such banks and defaulters be treated by the government? Critically comment. (200 Words)
The reckless lending by public Sector Banks (PSBs) and the subsequent misuse of funds by debtors is being blamed on the phenomenon of ‘crony capitalism’. Crony capitalism implies a collusion of businessmen and politicians whereby the latter guard the former and in this case, politicians guarded businessmen thereby leading to situation where the latter has no intention to pay back the loan.
However, describing it as an instance of ‘crony capitalism’ would be like focusing on tip of the iceberg. There are other factors too that led to reckless financing and wilful default by debtors-
  1. Economic boom prior to 2008 crisis provided the banks with a situation to lend loans to finance infrastructure projects
  2. Slow pace of recovery of loans through Debt Recovery Tribunals has made the debtors complacent thus giving rise to ‘wilful default’
These banks that indulged in reckless lending and the defaulters should be handled in the following ways.
Banks-
  1. Separating post of Chairperson and Managing Director to ensure adequate checks and balances in working of banks
  2. Implementing ‘Indradhanush’ so that government’s interference can be minimized
  3. Streamlining vigilance process for quick action in case there is connivance of bank’s staff
  4. Rolling out Key Performance Indicators for PSBs and follow up action by RBI in case of poor performance
Wilful defaulters-
  1. Publicizing the name of ‘wilful defaulters’ so that they can come forward to pay back in order to come clean
  2. Adjudicating such defaulters in the Debt Recovery Tribunals (DRTs) in order to recover loans

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