1. Bank NPA’s: How to clear the bad loans mess

Bank NPA’s: How to clear the bad loans mess

Banks seem to be dithering when it comes to lending and recovery. This impression has gained ground and even chairman of the Bank Board Bureau has stated so.

By: | Published: November 23, 2016 6:17 AM
Banks are not doing enough for the purpose of recovery and/or lending. (Rohnit Phore) Banks are not doing enough for the purpose of recovery and/or lending. (Rohnit Phore)

Banks seem to be dithering when it comes to lending and recovery. This impression has gained ground and even chairman of the Bank Board Bureau has stated so. Banks are not doing enough for the purpose of recovery and/or lending. The humongous NPAs are just the tip of the iceberg, but the biggest worry is that public sector banks (PSBs) are conceding their share of business to private banks and other entities like P2P lenders.

The finance minister has suggested that banks may convert debt to equity and sell the stressed assets to PSU for it to operate and manage. The idea, is worth experimenting, but modalities should be worked out before its implementation. If banks do decide to sell the unit to a PSU, then valuation of asset is likely to become an issue. More often than not, these assets are created by inflating the cost and, thereafter, the contribution made by the promoter is siphoned off. A peep into the past will open up a can of worms and borrowers will resort to litigation to delay this process. But then again, such borrowers need to bring back the funds into the system before their companies can be sold or taken up for restructuring of any sort. The assets are to be sold under SARFAESI to obviate delay and reduce outstanding debt. Borrowers resort to such tactics because they know their financial shenanigans will not cost them a bit. But, if management is handed over to the PSU, then different set of problems will crop up. Will the top management be changed, who will provide last mile liquidity, and what interest will the PSU have to turn it around, are some of the issues that will have to be addressed. Besides, stockholders and promoters will resort to frivolous litigation for derailing the whole process.

The restructuring schemes formulated by RBI, such as SDR or S4A, are good and are intended to provide leeway to banks to wrest control from the borrower. But, the so-called advantage under these schemes end here. No wonder that the schemes have been revised time and again, and were revised yet again on November 10. The objective of these schemes, is to provide succour to all defaulters, including those who siphoned-off money from the system but have not been labelled as wilful defaulters. No attempt is being made to segregate the wheat from the chaff, to discount the honest borrowers who suffered for reasons beyond their control. Even banks are loath to doing this as wilful defaulter does not arm them with any ammunition to fight the war. Unless there are penal provision for wilful default, making it a crime, default and diversion of funds will continue and banks will have to keep on incentivising unscrupulous borrowers.

Let’s study the ecosystem in which banks work. A mistake is sufficient to spoil someone’s career. So, those who make no effort to lend or recover, rise in hierarchy, and non-performance gets rewarded. Instead, those who take a decision have to face some charge or the other not withstanding the fact that to err is human. Moreover, it’s not uncommon for the act of bankers to be judged by a police officer few years down the line with pre-conceived notion that the banker was dishonest. So, if a banker recovers an NPA by sale to ARC, now, and the account gets back on track after the security receipt had been redeemed at loss, then one fine day, a police officer will question the banker and attach motive for selling it cheap. The government, thus, should allow a bad bank to address such apprehensions.

Another debate is about disclosing the name of defaulters. Supreme Court should make wilful default a crime, as is prevalent in some other countries.

Moreover, the courts needs to support cases of recovery, like the debt recovery tribunal (DRT) of Bengaluru did in the Airbus case. In a case filed against Airbus Industries in 2014, as it neither delivered aircraft nor refunded pre-delivery payment given by three banks on behalf of Kingfisher, the DRT Bengaluru passed an order on October 18, 2016 that the company needs to deposit the entire amount of R192.6 crore in eight weeks.

An honest attempt needs to made to resolve these issues. A bank officer knows that once charge-sheet is issued to him, he will be left to fend for himself. It behoves well for the banking fraternity to have some sort of mechanism to address these issues where financial and moral support is provided to innocent officers for bonafide acts. Some action on the ground to protect banker from idiosyncrasy of the management and wrath of CVC and CBI is needed so that the bankers engage enthusiastically for lending and recovery.

Public sector bankers have discharged social obligation by implementing poverty alleviation schemes thus serving rural poor admirably. Now, they are working day and night, against all odds to help people exchange high denomination currency notes They have been the engine of growth for the economy as they have lent to infra-projects and have opened Jan-Dhan accounts to implement financial inclusion. It’s in national interest that issues plaguing the PSBs are resolved and morale of officials is kept high, so that banking activity is put back on track.

The author is former ED, UBI, and visiting professor, NIBM.

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