Asking banks not to classify loans as NPAs will help those borrowing, but this is a call that only bankers must take
While the Supreme Court’s intentions of helping borrowers under duress, by asking banks to not classify stressed accounts as non-performing assets (NPAs) are laudable, the directive will put the health of the banking system in jeopardy. Delaying bad news never helped anybody. Indeed, even suggesting that the government and the regulator would have greater discretion in running banks, than bankers, is not a good idea. Clearly, the regulator—not the government—should frame the broad rules, regulations and guidelines within which banks must operate. But, banks must have full discretion to deal with individual clients in the manner they feel best since they are held responsible for the exposures. Interference in lending practices for so many decades—including the notorious practice of phone banking—is the reason that the system is so full of rot.
If banks are stripped of their powers, they can never discipline borrowers. Even otherwise, not classifying assets properly, on a real-time basis, is poor corporate governance; shareholders have the right to know the true state and quality of the loan book at any point in time.
Right now, an NPA must be classified as such if the borrower has not paid up within 90 days of the due date; that is enough of a grace period. Given the unprecedented circumstances of the pandemic, the Reserve Bank of India (RBI), has decided to permit a one-time recast of stressed loans. That, in itself, is not a good idea because it camouflages the health of balance sheets for a good two years. But, this will, presumably, be done only for a select set of companies. Those that have been badly hurt by the lockdown and need support. A blanket non-classifying of stressed assets will, however, create a moral hazard. As senior bankers had pointed out, the blanket moratorium offered to customers resulted in rampant indiscipline since every borrower decided to take a break from paying interest. Indeed, it is surprising that there has been such a long debate on intertest waiver—during the moratorium period—and that the matter is still being heard in court. As banks, government and RBI have all told the court, interest cannot be waived; it must be paid by borrowers though they are entitled to ask for time to repay it.
Banks have rightly argued they cannot be foregoing interest when they need to service depositors.
Similarly, assets cannot be classified as standard when they are not standard. Overturning RBI regulations—which is what the court is doing—can be harmful for banks and the economy. Unless banks are allowed to function autonomously, they will simply stop doing business for fear of being bullied by errant and indisciplined borrowers, and rising NPAs for which they do not have adequate capital. Already, banks are so reluctant to lend they are content to leave funds lying with RBI for a paltry 3.35% or park them in government bonds at 5.8-6%. Taxpayers are still paying for the loan losses for the banking system, which at one point had crossed 12% of assets. Today, with the economy contracting and the IBC suspended, banks are becoming increasingly vulnerable to large loan losses. They need to have complete control over their operations to be able to stem the rot.