For the past five years, the Indian banking system is struggling with non-performing assets (NPAs). According to a Reserve Bank of India’s report, total NPA is currently at 10.2 per cent of all assets. Currently more than Rs 7 lakh crore worth loans are classified as Non-Performing Loans in India, which is a huge amount and it translates to near 10% of all loans given. This means that about 10% of loans are never paid back, resulting in great loss of money to the banks. Furthermore, it has been learned that 90 per cent of bad loans could not be recovered during 2014-15 to 2017-18.
It is an asset, which is classified as loans or advances that are in default or are in arrears on scheduled payments of principal or interest. Generally any asset which stops giving returns to its investors for a specified period of time is also known as Non-Performing Asset (NPA). Let us see, how it has affected the Indian banking system.
|Name||Bad loans (2014-2018) till 2017 Dec – Written off||Recovery from written off accounts by PSBs|
|UCO Bank||Rs 6087||0|
|Indian Overseas Bank||Rs 10,470||Rs 10|
|Allahabad Bank||Rs 9,533||Rs 257|
|IDBI Bank||Rs 16,568||Rs 479|
|Corporation Bank||Rs 10,790||Rs 562|
|Bank of India||Rs 17,680||Rs 1,099|
|Bank of Baroda||Rs 10,571||Rs 915|
|State Bank of India||Rs 102,587||Rs 10,396|
|Punjab National Bank||Rs 27,814||Rs 6,270|
|Canara Bank||Rs 13,917||Rs 3,248|
|Syndicate Bank||Rs 5,363||Rs 1,535|
|Total||Rs 272,558||Rs 29,343|
There two main reasons for NPA are external and internal, where former is related to the activities outside the preview of the bank and the latter is due to activities inside the banks.
Non-performing assets could be due to losses due to changes in the business sector. Secondly, global, regional financial crisis which results in erosion of margins and profits of companies, so this stressing their balance sheet results into non-servicing of interest and loan payments. In country’s like India where government writes off loan given to people or community can create NPA. Due to bad governance and policy paralysis which hampers the timeline and speed of projects, therefore, loans can become NPAs. For example, infrastructure sector delays in approvals resulted in the interruption of the project which resulted in loan default.
There are three fundamental principles for any loan. A) Safety, B) liquidity, C) Profitability. Safety means that the borrower is in a position to pay back the loan, both principal and interest. The refund of loan depends upon the loan borrowers, capacity and willingness to pay. Banks should therefore take utmost care in ensuring that the enterprise or business for which the loan is got. While providing unsecured loans banks depend on the honesty, integrity, and financial soundness and credit worthiness of the loan borrower. So bank must analyse the borrower’s own capital investment and they should collect credit information of the borrowers from like enquiry from a market/segment of trade, industry, business. Banker should inspect and scrutinize the balance sheet which shows the true picture of business will be revealed on analysis of profit/loss a/c and balance sheet. When bankers give loan, he should examine the purpose of the loan. To make sure safety and liquidity, banks should grant loan for productive purpose only. Banker should study the profitability, viability, long term acceptability of the project while financing. Finally, if there are bad elements it leads huge frauds.
Today, public sector banks like UBI, SBI, PNB along with 24 banks, have such abnormally high NPA. There are two types of defaulters. 1st types are big companies and corporate houses which make willful defaults. For example, loans totaling over Rs 8,000 crore were given to absconding industrialist Vijay Mallya during the tenure of the previous UPA government at the Centre, where declared a non-performing asset (NPA) in 2009 and was restructured in 2010. Second types are loans to agriculture. Public banks, are most possibly under political and economic pressure gave loans to a lot of companies which defaulted. Since 2010, despite a lot of agricultural loan waiver schemes, the agricultural sector has led to high NPAs in the bank. So the high NPAs of these banks have got more to do with political decisions taken during the previous government regime.
Huge frauds can also raise the NPA of the bank. For example, Punjab National Bank (Mumbai) filed a criminal complaint with the Central Bureau of Investigation (CBI) against 3 companies. The names of the companies including Solar Exports, Stellar Diamonds and Diamond R US, and four people, including Nirav Modi and Mehul Choksi, the managing director of Gitanjali Gems. The bank has alleges two junior employees at the Mumbai branch had helped the companies and in getting letters of credit or "letters of undertaking" (LoUs) from it without having a sanctioned credit limit or maintaining funds "on margin.
The governments of India and RBI have proposed various measures to tame the Non performing Assets issue. Some of them are restructured standard account provisioning has been increased to 5% making it easier for banks to go for restructuring. RBI has already directed banks to report to the Central Repository of Information on Large Credit (CRILC) when principal and interest payment not paid within 61-90 days. Banks should conduct sector wise and activity wise analysis of the NPA. SEBI has already eased norms for banks to convert debt of distressed borrowers into equity. 5/25 scheme has been announced, where, existing and new projects greater than 500 crores and also for existing projects which have been classified as bad debt or stressed asset, the bank can provide longer amortization periods of 25 years with the option of restructuring loans every 5 or 7 years. Strategic Debt Restructuring Scheme where an alternative to restructuring is offered. Wherever restructuring has not helped, banks can convert existing loans into equity. Sale of non-core assets in case company has diversified into sectors other than for which loans were guaranteed. Finally banks have allowed to split the stressed account into two heads – a sustainable portion that the bank deems that the borrower can pay on existing terms and the remaining portion that the borrower is unable to pay(unsustainable). The latter can be converted into equity or convertible debt giving lenders a chance to eventually recover funds if the borrower is unable to pay. The Scheme will help those projects which have started commercial operations and have an outstanding loan of over Rs 500crore.
Apart from this, the terms of bank chairpersons and directors must be elongated in order to effect worth full changes and to hold them accountable. Terms of chairpersons should align with the life of the loan, which would allow defaults to be detected and penalties to be meted out as and when there is required. Incentives for PSB personnel must be significantly expanded. The top PSU bank chairman’s salary is equal to that of a fresh business graduate in an MNC bank. A better incentive structures will attract better talent. On the other hand, penalise for wrongdoing. Despite the presence vigilance mechanism, wrongdoing is rarely penalized. Rotation of staff can really stop operational and risk management failures in various levels in public sector banks. It offers to detect the brightest talent and less competent staff during inspection and supervision.