Reserve Bank pins blame on corporates' fund diversion for mounting NPAs

Reserve Bank pins blame on corporates' fund diversion for mounting NPAs

Anirban Nag

Mumbai, June 29: The Reserve Bank of India (RBI) has said that diversion of funds by promoters for expansion, modernisation and setting up of new projects is the single largest factor responsible for the increase in banks' non-performing assets (NPAs). The central bank has also blamed government policies, import duty changes, deregulation and weak credit appraisal skills among other reasons for the rise in NPAs in the banking sector.

In a status report prepared by the department of banking supervision (DBS), which was released on Tuesday, the RBI said that the gross NPAs of public sector banks were rising along with the net NPAs. While the gross NPAs stood at Rs 45,653 crore in 1997-98, up 4.7 per cent over the previous year, the net NPAs stood at Rs 21,232 crore, up 4.6 per cent over the same period.

"Reduction of NPAs in the banking sector should be treated as a national priority item to make the Indian banking system more strong, resilient and geared to meet the challenges of globalisation," the RBIpaper said.

The study included the top 50 NPAs of 33 banks, comprising 27 public sector banks and the top six private sector banks as on March 31, 1997. It concluded that apart from funds diversion by promoters, the other reasons for NPAs were:

Time/cost overrun while implementing the project;

External factors like raw material shortage, raw material/input price escalation, power shortage, industrial recession, excess capacity, natural calamities;

Business failure like the product failing to capture the market, strike/ strained labour relations, wrong technology, technical problems and product obsolescence;

Failure, non-payment/overdues in other countries, recession in other countries, externalisation problems and adverse exchange rate; and

Wilful default, siphoning of funds, fraud, misappropriation, promoters/management diputes.

The paper observed that NPAs were in a cross-section of industries such as ferro alloys, manmade textiles, real estate/civil andproject-related construction, pharmacueticals, leather/good export, garment export, fertilisers and chemicals, cotton, tea/coffee, jute sugar and jewellery.

According to the paper, the proportion of NPAs in the priority sector to total NPAs was 48.27 per cent as on March 31, 1996, which has gradually declined to 46.40 per cent as on March 31, 1998. The information on the composition of priority sector loans of the total NPAs was taken from 27 public sector banks at the end of financial years 1996, 1997 and 1998.

"From an analysis of the data, it could be inferred that the higher NPAs in priority sector advances have pushed up overall proportion of NPAs of these banks by about 3 per cent to 4 per cent," the paper said.

It called for amendments to banking-related laws for quicker recovery of sticky loans. "The necessary changes in the legal framework, i.e Banking Regulation Act and other bank-related acts, may be expedited provising therein repossession of the collateral, foreclosure and bankruptcyprocedures for defaulting borrowers," it added.

It also called for publishing the names of those borrowers who have settled their dues through a compromise or in court for a substantial amount so that other banks can deny further facilities to such borrowers for a certain period of time.

INSIGHT
Banks must turn proactive

In India, it has always been the case that while industries languish, promoters flourish. The truth of this adage has been forcibly brought out in the RBI study. However, there is yet another factor which might lead to increasing NPAs. This is the restructuring of the Indian corporate sector. Unless the banking system proactively arranges mergers and acquisitions, corporate distress could well lead to an explosion in bank NPAs.

--Percy Dubash

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