1. Bank NPA crisis: Here’s what is crucially missing

Bank NPA crisis: Here’s what is crucially missing

Proper medicine is prescribed for chronic NPA infection, but what is missing is strict implementation

By: | Updated: June 30, 2016 9:05 AM
psu-re-L The government had delegated selection and appointment of SCAs and SCBs to individual PSBs from 2014-15 from the eligible list of firms, giving enough freedom to choose the auditors of their liking. (Reuters)

RBI Governor Raghuram Rajan will be remembered for his relentless pursuit of India’s monetary policy reforms, controlling inflation and advocating a stable policy framework. His precise diagnosis and direction for “deep surgery” for the chronic NPA problems of the banking sector, especially in public sector banks, is also noteworthy. He minced no words when he said that routine “band-aid” would not clean up the balance-sheet mess and put them back on a healthy trajectory.

RBI has been issuing master circulars from time to time, encompassing entire aspects of ensuring true and fair financial statements of banks. RBI has insisted that the new restructured loans, where the borrower has renegotiated the terms of repayment, must be classified as non-performing assets (NPA) from April 1, 2015, with provisioning of 15% of the outstanding instead of 5% for restructured loans, so that banks can take early recovery action or sell NPAs to asset restructuring companies (a loan turns into an NPA when interest repayments remain due on the 91st day).

Financial audit of banks are done by statutory central auditors (SCAs) and statutory branch auditors (SBAs). On the basis of prescribed eligibility criteria determined by RBI, the CAG prepares graded panel for empanelment and selection of eligible SCAs and the The Institute of Chartered Accountants of India (ICAI) prepares a panel for eligible SBAs in PSBs and send the panels for RBI’s scrutiny before finalisation of the lists. RBI has prescribed the number of SCAs and SCBs to be appointed to audit large, medium and small PSBs, and for audit of their branches.

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The government had delegated selection and appointment of SCAs and SCBs to individual PSBs from 2014-15 from the eligible list of firms, giving enough freedom to choose the auditors of their liking. Banks are free to select statutory auditors from the list with the approval of the Audit Committee of Board (ACB). The selection of audit firms as SCAs and SBAs is subject to RBI approval. The independence of auditors/audit firms is ensured by appointments of SCAs for a continuous period of three years, subject to satisfying the eligibility norms by the firms each year; PSBs cannot remove audit firms during the above period without the prior approval of RBI.

The option to consider whether concurrent audit should be done by bank’s own staff or external auditors is left to the discretion of individual banks. A critical issue is that auditors should be experienced, well-trained and, most importantly, adhere to applicable accounting and auditing standards, mandatory guidelines and the ethical code of conduct. Auditors must be able to function independently with professional autonomy and judgement. Adequate facilities and the requisite records must be made available to auditors with initial and periodical familiarisation of the process. Relevant internal guidelines or circulars or important references including the circulars issued by RBI and/or Sebi and other regulating bodies must be made available to the concurrent auditors.

Remuneration of auditors may be fixed by banks following the broad guidelines framed by the ACB, taking into account coverage of areas, quality of work expected, number of people required for the job, number of hours to be spent on the job, etc. Banks may devise a proper reporting system and periodicity of various check-list items as per risk assessment. Serious irregularities pointed out by the audit should be straight away reported to the controlling offices or head offices for immediate action. The findings of the concurrent audit must be placed before the ACB. An annual appraisal or report of the audit system should also be placed before the ACB.

Whenever fraudulent transactions are detected, they should immediately be reported to the inspection and audit department, and the chief vigilance officer and controlling officers. Follow-up action on the concurrent audit reports must be done promptly by the controlling office and inspection and audit department. When RBI has been insisting on true and fair financial statements by banks through various notifications, master circulars, guidelines and directions time and again, why has the banking sector, especially PSBs, been pursuing window dressing so consistently for years till the position reached the current imbroglio? Statutory auditors finally certify the accounts true and fair. Whenever any falsification of accounts on the part of the borrowers is observed by the banks or financial institutions, the auditors are responsible to bring it to the notice of the management. Auditors must have to follow auditing standards, applicable accounting standards, rules and the professional code of ethics. Being the regulator of chartered accountants, ICAI is duty bound to fix accountability of auditors if they are found lacking in professionalism and ethics.

There should be disciplinary action by ICAI. In fact, ICAI, RBI, the Department of Banking Supervision and Indian Banks’ Association are mandated to circulate the names of guilty chartered accountant firms. RBI is required to share such information with other financial sector regulators, ministry of corporate affairs and CAG. The lenders can obtain a specific certification from the borrowers’ auditors regarding diversion/siphoning of funds by the borrower. The rules also specify that banks and financial institutions may ensure incorporation of appropriate covenants in the loan agreements to facilitate such certification by auditors. RBI stipulates that lenders may engage their own auditors for such specific certification purpose without relying on certification given by borrowers’ auditors for ensuring proper end-use of funds and preventing diversion/siphoning of funds by the borrowers. Bank must invariably exercise basic minimum own diligence in the matter.

Master directions issued by RBI in January 2016 consolidate all regulatory matters under various Acts and are put on the RBI website. Proper medicine is prescribed for chronic NPA infection, but what is missing is strict implementation. Creating more rules, regulators and watchdogs may lead to overlaps, confusion and would prove to be counterproductive. If prompt administration of extant rules is taken care of and due diligence is exercised by regulators, bank management, auditors, audit committee and the board of directors, the NPA crisis can be resolved.

The author, a former director-general in the office of CAG, is working as advisor and consultant to the Institute of Public Auditors of India

  1. Danendra Jain
    Jul 1, 2016 at 3:48 pm
    RBI Governor Mr. Raghuram Rajan says that NPA (Non Performing et) is deep rooted and severe and those who think that NPA is under control are mistaken .He said that NPA menace is far from over. “He wished good luck for those in the system who believe that NPA problem is over,” I fully agree with the views of Mr. Rajan and I also feel that volume of NPA in Public Sector Banks (PSU) is not only 7 or 8 percent of total advances. It is many more times of what is stated and reflected in Balance Sheets of various banks declared. As a matter of fact , majority of top bankers verbaly instruct their juniors not to clify bad debts as NPA . And officers who do not obey the oral advices are subjected to frequent transfers and rejction in promotion processes. On the contrary who abide by instructions flowing down from top officials blindly and use various tools to conceal bad debts are awarded with choice posting and quicker prootion.This is why officers who do not know much about even banking laws and practices and those who do not know even ABC of lending principles are given promotion in shortest tenure of service. IN this way, inexprinced officers are being elevated to higher and higher scale and given higher and higher responsibility and on the other hand experienced , efficient and talented staff are to work under them. As such, there is no doubt that bank management is inviting more dangerous position. I may say (as I have been saying for years and decades ) without any hesitation that volume of NPA will continue to move up and up unabated. All efforts said to have been taken or promised to be taken will totally fail and prove ineffective. Culture of lending is so bad that one cannot dream of any reduction in speed of creation of bad debts. In the way Human resource is treated by top management in each bank, one may say that majority of officers in PSU banks are busy in keeping their bosses happy than in sauarding the interest of the bank they are serving. RBI Governor Raghuram Rajan will be remembered not only for his relentless pursuit of India’s monetary policy reforms, controlling inflation and advocating a stable policy framework but also for his precise diagnosis and direction for “deep surgery” for the chronic NPA problems of the banking sector, especially in PSU banks. He minced no words when he said that routine “band-aid” would not clean up the balance-sheet mess and put them back on a healthy trajectory. Gross bad loans at commercial banks could increase to 8.5 per cent of total advances by March 2017, from 7.6 per cent in March 2016, according to projection made by the Reserve Bank of India (RBI) in its Financial Stability Report. The report says “The macro stress test suggests that under the baseline scenario, the gross NPA may rise to 8.5 per cent by March 2017,” and “If the macro situation deteriorates in the future, the gross NPA ratio may increase further to 9.3 per cent by March 2017.” Here I would like to say that if all hidden bad debts and all stressed accounts are truely scanned by absolutely honest officials and essed strictly as per prudential norms presribed by RBI in this regrrd, there is no doubt that Gross NPA of bank may go up to 30 to 40 percent level. As of now, banks which are considered comparatively better are better not because of they are doing quality lending but because they are good manitors and they know the art of hiding stressed ets . Gross bad loans of Indian banks widened to 7.6 per cent from 5.1 per cent in September 2015 and from 4.6 per cent in March 2015. Gross NPAs rose 79.7 per cent year-on-year in March 2016. Clever officers of PSU banks put entire blame for such unprecedented and abnormal rise in bad debts to adverse economic situation , to recession and to global slowdown. They do not want to own responsbility for rise in bad debts and for wilfull window dressing going on in PSU banks for years and decades. Here it will be wise to point out that Private sector banks have been doing well under the same economic environment in which PSU banks are working. The net NPA of the banks also increased sharply to 4.6 per cent in March 2016, from 2.8 per cent in September 2015. Public sector banks’ net NPA was 6.1 per cent, while the ratio for private sector banks was 4.6 per cent. PSU banks have been lootd by large borrowers in nexus with evil minded and corrupt bank officials sitting at top posts in PSU banksand politicians ruling this country. Banks were nationalised to save poor from exploitation in the hands of private banks and local money lenders. But slowly banks reduced their exposure on poor and increased their exposure on large borrowers . Finacial Stability Report published by RBI says that large borrowers, and significantly the top 100 largest debtors, are primarily responsible for the bad loan problem in Indian banks. Top 100 borrowers account for 19.3% of all bank bad loans at the end of March 2016 compared with 0.7% a year ago. In March 2015 share of large borrowers i.e. of top 100 borrowers was 58.1% in total advances and that of NPA was 72.8% in total NPA. In March 2016 , share of large borrowers is 58% in total advances whereas share of .bad loan is 86.4% in toal NPA. Since 1991 bank management have been enjoying unregulated freedom not only in recruitment and promotion of bank staff but also in lending. IN the name of target given for crdit growth and for booking higher profits, they shut their eyes and distributed bank's costly funds to large borrowers who can oblige bank officers in different ways. Promoters of large business firms usually have best liasoning with political masters , with Ministry of Finance and with RBI officials too in addition to top officials of all banks . They help bank officers not only in incresing their wealth but also in getting promotion out of way.Bank officer at junior level in general make efforts to please their bosses some how or the other and for this purpose they do not hesitate in violating even normal principles of lending, monitoring and recognition of Non Performing ets. Bank officers are loyal to their bosses because it is their bosses who can make or mar their career and it is they who can disturb their life, thier family life and their mental peace . As such it is always safer for them to keep bosses always in happy mood , either by giving bribe in cash or by offering costly gifts or by indireectly helping bosses and helping friends, kith and kin and friends and relatives of their bosses or by sitting late in office or by doing household work of families of bosses or by extending red carpet welcome to higher bosses during their visit. Similarly political masters i.e laders of ruling political party who rule over bank officials are also less loyal to their voters but more loyal to their superiors so that they may grow up by leaps and bounds in wealth , in power and in postion. Society also gives values to those who give them illegal help, who give them aids and subsidies and who allow them in carrying on their illegal activities. In our society, people are worshipped not due to his values and efficient working but based on caste, community or religious atude. There used to be a por proverb and which usually taught in every schools and colleges that "Honesty is best policy and Survival for the est". In modern era this proverb no more holds good. People considers such culture of an officer as his weakness and hurdle in path of progress. That is why , the proverb in practice is now changed to "Dishonesty is the best policy and Survival for the Flatterers. Present Government is wondering in dreamland if they think that merger and consolidation of banks will help them in containing bad ets and in changing the culture of lending. They are totally mistaken if they think that health of PSU banks will improve only whey become voluminous and they attain a global rank in business volume or in branch network or in capital base. On the contrary, there is all possibility that brainless merger will aggravate the problem instead of resolving it. In fact efforts taken by present government may change the colour of bad ets , but cannot improve the quality of lending and monitoring and that of efficiency of administrative and legal machinaries.After exit of Rajan from RBI and apointment of new person who will be frinedly to current government as Governor in palce of Rajan , Government may try to deal with problem of stressed ets by permitting liberal restructure of stressed advances , by evergreening of bad advances , by liberal compromise settlements and even by writing off of bad loans. They may form a bad bank or sell stressed ets to ARCs working in the country. All these steps may give temporary relief and help banks in fraudulently reducing volume of bad ets for the time being. This evil culture has become the way of life for bankers. They have forgotten their actual job of banking. But in the long run , health of banks will deteriorate and cause more and more devastating results than what are visible now. Government may change the Port-Mortem report to project murder or suicide to appear as natural death. But truth cannot be altered, bad culture cannot be changed and hence slippage and bad lending will continue to make the health of PSU banks more and more critical. Crime in a state does not come down if police officers stop lodgement of FIR. Similarly banks balance sheet cannot be considered clean if they hide all bad loans as Nd SD how NPA accounts as standard. Lastly it is taxpayer's easy money which will be used by government as hitherto done and more and more capital infusion in sick banks for survial and for hiding evil works of bankers and politicians will be resorted to.Due to faulty policies and due to large scale corruption in political and banking circles, banks in general are not in a position to pay even respectable wage to working staff, reasonable interest to their depositors and dividends to their invesotrs and stakeholders in banks. Unfortunately , there is no one in the system who can fix responsibility on evil officers and evil politiicans. Volume of bank's loaning scam and writing off of loan scam is ,as I think greater than all other scams of the past.

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