Much has been said about how NPAs have been piling up, especially on the books of PSU banks (or PSBs), and how lenders are to blame because of the poor quality of the appraisals they carried out. There is some element of truth in this; consortium-banking lending, where the lead bank shoulders the bulk of the responsibility, has left lenders a tad complacent. Also as speakers at the FE Best Banks debate pointed out, several loans were made without perfect due diligence—it was assumed, for instance, that coal linkages would be provided for power plants—since the economy was growing rapidly. Also, as SBI chairperson Arundhati Bhattacharya pointed out, a project that is viable when the economy is growing at 9% can become unviable when the ecosystem is sluggish, more so in the case of SMEs that are squeezed by their larger customers and don’t have any staying power.
The government too must accept its share of the blame since much of the damage has taken place in the infrastructure space where projects are stalled—and bank funds stuck—simply because the promised fuel linkages didn’t materialise and environment clearances didn’t come through. If banks went ahead and lent to power projects or road projects, it was because no one expected the government would not honour the letters of intent that it issued. Banks have also been hamstrung by regulations that don’t take cognisance of the situation on the ground. For instance, they have been funding long-term assets, of 25-30 years, whereas their liabilities are short-term in nature. Apart from the fact that there is an asset-liability mismatch to begin with, since borrowers are being asked to make repayments in a compressed time frame, even a slight delay in the project or a minor cost overrun ensures the account gets into trouble. Indeed, had banks been permitted to accept a bullet repayment at the end of ten years and refinance the project, they might have been better off, but that is not allowed. Also, a large number of stalled projects can be kick-started with some extra funding but banks aren’t willing to lend more because RBI rules stipulate that any extra lending beyond 10% of the project cost means the asset will be classified as a restructured one.
Indeed, banks could have recovered much of their money from promoters if only the legal process had been more helpful; Debt Recovery Tribunals (DRT) have been extremely ineffective, frustrating the attempts of banks to get back their money. The legal system needs to be less skewed in favour of promoters who manage to keep a verdict on hold for years on the flimsiest of grounds. There are also rules that make it impossible for PSU banks to directly negotiate sale of a potential NPA with interested buyers. A system in which the equity provider is taking virtually no hit and the lending institution is being pushed into a corner cannot be a robust one.