Finance minister P Chidambaram held a meeting of the public sector bank (PSB) chiefs on July 3 to discuss mechanisms to strengthen recovery of bad loans or non-performing assets (NPAs). The focus will be on the top 30 NPAs and gross NPA accounts of over Rs 1 crore.

Slow economic growth and soaring NPA levels have left the Indian banking sector struggling and in an attempt to effectively address the problem, the finance minster has advised banks to strengthen loan recovery mechanisms and take strict action against wilful loan defaulters.

At the meeting with public sector chiefs in the capital on Wednesday, Chidambaram directed them to concentrate on effecting loan recoveries from the top 30 wilful defaulters whose accounts formed a major chunk of the gross NPA accounts.

“You focus on the top defaulters, as well as keep an eye on the top performing accounts. A close watch is being kept on the top 30 non-performing accounts in each bank and action will be taken on the defaulters,” the minister said.

While India survived the global financial meltdown of 2008 without much hurt, the rising NPAs in the banking sector can lead to a major disaster soon. The going definitely looks tough. Banks need to rise to the occasion, and take bold measures to weather the approaching storm.

While bankers and some analysts are calling the crippled economy the villain, there are others, including the Reserve Bank of India (RBI) deputy governor Dr KC Chakrabarty and financial services secretary Rajiv Takru, who blame the inefficiency of banks and their inability to say “no” to unviable projects that have contributed to the piling bad debts.

NPAs have only been surging in recent times as latest data released by the parliamentary standing committee on finance headed by Yashwant Sinha reveals. According to the committee’s 67th report, tabled in parliament in April, gross NPAs of public sector banks (PSBs) were reported at a whopping Rs 1,56,322 crore as on December 2012 as compared to Rs 1,12,489 crore in March 2012. This 39 percent increase was on account of all kinds of loans given to agriculture, priority sector, corporates and other sectors turning bad.

Of the four sectors, it is the corporate houses that have failed miserably in repaying their debts as total corporate NPA stood at a staggering Rs 83,490 crore in December 2012, a 191-percent rise from Rs 28,678 crore in March 2012. Advances made to sectors other than the priority sector are not too far behind, with NPAs recording a 182.07 percent increase from Rs 29,793 crore in March 2012 to Rs 84,039 crore in December 2012.

In comparison, NPAs in the remaining two sectors – agriculture and priority – recorded a lower growth at 96.01 percent and 73.9 percent respectively.
Blaming the deceleration in the economy for the present situation, Deepak Narang, executive director, United Bank of India, said that it was “natural” for companies to default on loan repayment. “In the last few years, the economy has not been performing well, so the demand for goods and services has gone down drastically. This has impacted the finances of corporates, which is why they have not been able to repay their debts,” Narang said.

He also said that most loans given out did not turn bad overnight and so it was unfair to blame only the corporates or the banks for the present situation. “Most of these advances were made when the times were good, as the banks had the confidence that the loans would be repaid. Who is to be blamed if the corporates are facing a liquidity crunch due to dampened demand in a volatile economy like ours?” he asked.

Echoing the sentiment, Sangeet Shukla, senior advisor with the Indian Banks’ Association, which has 173 members from the banking community, termed the situation as merely a “reflection of the real economy”. “It would be unfair to put the blame entirely on corporates as even collateral provided by them fail when the economy is languishing,” he said.

However, this theory has been criticised by RBI’s KC Chakrabarty, who said that banks are in this situation not just because of the slowing economy but because of their own (in)actions.

“For me, NPA stands for non-performing administration,” Chakrabarty told Governance Now. “As and when there is an administrative failure, where either the banks fail to undertake due diligence before making advances or the borrowers (especially corporate houses) overestimate their financials and go in for greater leverage (debt), loans are bound to turn bad.

“We are concerned about the way the banks are managing their credit portfolios at the approval stage, monitoring and restructuring stage, and at the recovery stage. The governance capabilities, risk assessment capabilities and the ability to price risks are definitely inferior among the PSBs compared to their private sector counterparts,” he said.

Moreover, financial services secretary Rajiv Takru at a bankers’ conference in June slammed the banks for behaving like “cowboys” and asked them to exercise extra caution while dealing with public funds.

PSBs vs private banks: Unfair comparison?
In addition to the NPA figures, the standing committee report also highlights the poor performance of the PSBs vis-à-vis the private and foreign banks.
According to the committee’s findings, gross NPAs of public sector banks alone, which were at Rs 59,924 crore in 2010, shot up by 24 percent in the following year to Rs 74,664 crore. This figure further ballooned by 57 percent to Rs 1,17,262 crore in 2012. This indicates that the growth in NPAs of PSBs has not just persisted but more than doubled in the last two years. This could be worrying as PSBs hold approximately 70 percent of the country’s banking assets.  

Going by the financial results for FY 2012-13, it is mostly the PSBs whose gross NPA figures have reached alarming levels. This list includes State Bank of India (4.75%), its associate State Bank of Mysore (4.53%), Punjab National Bank (4.27%), UCO Bank (5.42%), Central Bank of India (4.80%), Indian Overseas Bank (4.02%) and United Bank of India (4.25%). On the other hand, leading private players such as ICICI Bank, Kotak Mahindra Bank, Axis Bank and HDFC Bank have gross NPA ratios of 2.68 percent, 1.3 percent, 1.06 percent and 0.97 percent, respectively.

This data reveals the stark contrast in performance between the PSBs and private banks. “These facts only illustrate the managerial failures of PSBs in their inability to arrest rising NPAs, which has doubtlessly affected their overall performance and weakened their ability to expand credit to deserving areas/sectors,” the committee noted in its report.

This is an uncomfortable situation as with the consistent rise in NPA figures and not-so-effective loan recovery mechanisms, PSBs have suffered a slump in profits.

This lopsided growth in bad loans has added more spark to the already heated public-versus-private banks debate. In their defence, public sector bankers call the comparison “incorrect” and blame the rising NPA figures to the higher amounts of loans given out by PSBs compared to the private banks.

“It would be incorrect to draw such a comparison because NPAs are not an overnight phenomenon. They are a culmination of past events and it is important that we primarily differentiate between the quantum of lending done by PSBs and private and foreign banks,” said CS Jog, former general manager (credit), Punjab National Bank and now executive director, Resurgent India, a financial consultancy.

He added that private banks have the freedom to “pick and choose” and can go about lending only to borrowers of their choice, while PSBs do not enjoy this kind of a freedom with medium- and small-scale borrowers.

However, Chakrabarty pointed that a lot of PSBs take a call on extending loans to a borrower (mostly in cases of corporate houses) based on their “perception” of the borrower’s ability to repay or on the lending pattern of other PSBs.

Pointing at the problem of the management of banks falling prey to an intuition and impression-based credit decision-making process instead of an information-based process, Chakrabarty slammed the PSBs for their “herd mentality”.

“The banks are managed by a board which is a professional body and along with the senior management, they have to frame objective credit risk policies after analysing all the information available to them. However, there are instances when some banks, especially PSBs, lend to a particular borrower just because its peer is lending. This can only be termed as herd mentality and a sign of weak governance,” he said.

Lights, camera and some action please
Earlier, in February, finance minister P Chidambaram had directed PSBs to step up loan recovery measures to improve the management of NPAs. The committee in its report has recommended setting-up of a special NPA management cell for reviewing write-offs/upgrades and monitoring the pace of recovery of NPAs. In addition, it has also suggested publication of names of all wilful defaulters in an attempt to improve recovery/warn the public at large.

Further, the central bank’s latest guidelines, issued on May 31, has made the debt provisioning and restructuring norms even more stringent. At present, banks need to set aside 2.75 percent of the total value of loans as provisions out of the banks’ profits to cover bad debts. However, March 2015 onwards, they will have to beef up these provisions to 5 percent of the total value of loans and this, analysts believe, would encourage banks to undertake the task of loan appraisals with more seriousness, something they had forgotten as they went on a lending spree.

Further, Chakrabarty said that banks have been advised to review their existing information systems to enable early detection of deteriorating assets. “We have advised banks to review their existing IT and MIS framework for early detection of signs of distress at individual account level as well as at segment level (asset class, industry, geography, etc). The banks should use this information for building an effective asset quality management framework as also a transparent restructuring mechanism for viable accounts under distress,” he said.

At the individual level, banks have also undertaken various measures to bring down their NPAs. For instance, UCO Bank, the PSB currently operating with the highest percentage of gross NPA (5.42 percent) has taken a “conscious decision” to almost stop lending to large borrowers, i.e. corporate houses for the next one year. “The country is caught in the shackles of an economic crisis that runs very deep and we do not see any progress happening till the next one year at least. We have, thus, decided to shift our credit model from large borrower advances to retail lending and in this way we will be able to diversify our risk,” said Anil Kumar, general manager (recovery), UCO Bank.

Kumar also said that the bank has stepped up its recovery mechanisms, including aggressively going in for naming and shaming of wilful defaulters. “Only two months ago we published the name of a leading textile and apparel company that has been a major defaulter and now they have started responding to our calls and making repayments,” he said. “In addition, we have also approached the courts requesting them to seize passports of and issue arrest warrants against wilful defaulters.”

He said all these measures had boosted recoveries made by the bank from Rs 300-400 crore to almost Rs 900 crore.

This first appeared in the July 1-15 issue of the Governance Now magazine.