Money & Banking
NPAs: Massive slippages in banks call for tough measures

RBI must lay out exhaustive directions mandating detailed procedures and the process of the conduct and content stock audit of borrowers preferably with a detailed checklist to ensure no step is overlooked. This only would help reduce the bad loans of NPAs

Ranjit Singh, the chief of Central Bureau of Investigation (CBI) laments, “bank frauds above Rs50 crore have grown almost 10 times in the last two years. Bulk of the non-performing assets (NPAs) related to just 30 defaulter accounts. The CBI has initiated inquiriesbanks need to realise that delays in reporting frauds affect recovery proceedings.”


This indicates the laxity at all levels in addressing this serious concern. In India the bad loans are designated NPAs while in the West they are termed stressed assets that have led to the inglorious end of great banking institutions across the world.


There are two reports in the Hindu Business Line: “Strengthen inspection of units financed, FinMin tells banks” and (Secretary Financial Services MoF) “Takru’s tough talk: Banks must seek management change before recasting corporate loans”. The belated reaction of our union ministry of finance (MoF) and the Reserve Bank of India (RBI), our banking regulator, being a mute spectator now waking up, appear to be acts of locking the stable after the horse has bolted. It is hoped that Raghuram Rajan, the new governor of RBI, will usher in urgent modifications in the archaic procedures and processes.


In India, when there is a banking regulator in the form of RBI for over half a century, why  the MoF and not the RBI is reacting to sharp deteriorations in the quality of loan asset portfolio of banking sector as a whole. This is indeed an extremely alarming worry for all, which if not addressed on a priority basis, will lead India to the Cyprus or Greece type bank collapses.


Today Indian banking sector is on an expansion spree, with 26 applicants waiting in a queue  for new banking licences to add to the present 1,700 commercial banks of various descriptions comprising 27 state owned, 21 private and 3 dozen foreign plus smaller regional rural and urban co-operative banks.


There is an urgent need to totally overhaul the banking sector by upgrading the systems of on-site audit of compliances with laid out checks and balances. It is rather disturbing to see both the MoF and the RBI now belatedly waking up to the reality of increasing wilful defaulters on their advances portfolios. The ratio of the gross NPAs to gross advances has risen to 3.8% in 2013 from 3.2% in 2012. The ratio of restructured standard assets versus gross advances of public sector banks (PSBs) shot up to 7.1% from 5.7% and for the banking sector as a whole, the gross NPAs to gross advances ratio rose to 3.4% from 2.9%. The ratio of restructured standard assets and gross advances increased to 5.7% from 4.7%. Further, according to the RBI’s latest Finance Stability Report, the macro stress test of sectoral credit risk among seven select sectors that include construction, agriculture, iron and steel and engineering is expected to register higher NPA ratio of 4.7% to 4.8% by 2014.


It is noticed that there is absolute laxity on the part of the RBI, as the banking regulator on the one hand and the top managements of the banks across the board on the other. Especially, when it comes to having in place effective steps to pre-empt and prevent slippages in the asset quality well in time long before the advances begin slippage and are even considered ‘distressed’ and turn out to be ‘bad’ or ‘NPA’.


As a statutory auditor of banks on the RBI panel for long, it is my experience that advances just do not turn bad overnight. They always tend to incubate over a period of time during which time they invariably subtly indicate, show prompt visible signs of impending or incipient delinquency which the officials at the branch level conveniently choose to give a go-bye by claiming ‘pressure of work’.


It is the officials at branch levels who ought to effectively monitor the delinquent advances on a day-to-day basis. More particularly when the borrowers approach branch management to accommodate them by granting temporary overdraft facility by clearing cheques that they have issued without adequate balance or in excess of their borrowing limits. These acts undoubtedly represent clear-cut cases of the borrowers’ bad financial management leading to an impending doom.


When the customers’ default in the timely submission of their monthly stock and receivables statement, it is sure sign that they do it simply because they have neither the inventories nor debtors that provide them with drawing limits to justify the collaterals for the following month. In the absence of fixation of fresh drawing limits based on security available as represented by statements, they wrongly continue to enjoy limits far in excess of the securities that are on offer. The officials permitting such irregularities should then be deemed to be in connivance with the borrower to defraud the bank and their filing of routine post facto condonation requests to their controlling office should not be permitted to regularize this gross irregularity.


What is not strictly adhered to is the strict compliance by banks of the requirements of periodic on-site inspections by carrying out physical verification of the inventories and receivables to confirm their existence and ascertain their realisability in case they are to be realised when the borrower is in default.


This on-site inspection has necessarily to be carried out by independent professionals or experts. The third party professionals have the expertise and work force to visit the client any number of times, which is not always possible for the bank officials or employees, who can be fobbed off by the delinquent borrowers with much to hide or in possible connivance. Under no circumstances should it be left to any bank employee particularly those dealing with the advances and their monitoring.


A stock audit has also to include inspection of records to ascertain the mode of valuations of the inventories, their stacking conditions and movements to detect overvaluations and shortages in stocks. For verifications of debtors, a plain and simple scrutiny of transactions in the accounts will go a long way in ascertaining realisability. Similarly, recording of fictitious invoices for purchases and sales or siphoning away of funds for unrelated activities by wrong diversions can also come to light well in time. 


The scope of the special stock audit exercise should also include in-depth procedure for improper or inadequate under pressure credit appraisals and sanctions as well as deficient post-disbursal monitoring, fake title deeds, multiple finance for the same security, inflated valuation reports, genuine business problems, diversion of working capital for unplanned capital and personal expenditure.


In cases of high-ticket large consortium advances, it is a practice for the lead banks to initially carry out the inspection to be followed up by the smaller lending partners carrying the audit independently in the subsequent period. It is noticed that those with a smaller share tend to act complacent by following the earlier report and not observe the standard verification procedures that the earlier verification may have overlooked.  It has to be ensured that each verification has to be a standalone exercise and not ‘follow the leader’ type.


Indian businessmen also have in their midst quite a few wilful defaulters, who are invariably past-masters in swindling banks. The banks need to effectively monitor such high-risk individuals or entities with hawk eyes. The advances imposed from the top need to be put on the extremely highest risk category. It should be ensured that all communications relating to sanction and disbursement and the original title deeds as well as all other relevant documents are safely sealed and inspected annually. Much more care is called for before considering any proposal for restructuring of debts.


MoF Secretary Rajiv Takru very rightly pointed out that banks must insist on management change before considering restructure of loans by companies. “Half the time they are in a mess because of poor decisions of management. They now have no moral right to continue. More and more cases are seen of people taking advantage of distress by going back on their obligations by trying to negotiate deals for moratorium, reduction in interest rates and waivers. The banking system has been ‘too tolerant’ of such misbehaviour and this is not required. Companies cannot sit back and expect the banks to continue to take the hits.”


Talking tough must necessarily be followed up with the RBI laying out exhaustive directions  mandating detailed procedures and the process of the conduct and content stock audit  preferably with a detailed check list to ensure no step is overlooked.  It is the actual on-site verification and not merely going by copying data files for non-existent securities that can uncover malpractices and will go a long way in preventing slippages.


(Nagesh Kini is a Mumbai-based chartered accountant turned activist.)



Vinay Joshi

3 years ago

Dear Mr.Nagesh Kini, FCA,

As per your profession you were auditing banks accounts as your employer was listed statutory auditor on the RBI panel & the Harshad Mehta scam, then, had also taken place. So you are trying to tell WHAT RBI should do! I’m not sarcastic, do not misunderstand me.

Global Trust – phenomenal example or Satyam – laxity of its auditors.


Why the stress in India’s 80trn banking system?

The CBI chief is Mr.Ranjit Sinha, as you quote him to state that 30[thirty] & only 30 are defaulters in the banking system & you yourself not given any gross bad assets or NPA’s.

Q1FY14, gross NPA’s were 2.06trn, up 12.02%, amounting to 3.85% of advances of the system.
The net NPA figures not with me, Q4FY13 it was 3.23%. Gross NPA’s do not reveal the gravity, the combination with restructured assets March’13 was 9.25%, why further accretion of NPA’s?

Further, RBI does not sanction any loans & it can pull up the banks & or initiate measures as per individual bank stress, if need be.
Why Pvt.sector banks are better off? Answer!

Mr.Nagesh, you talk about Cyprus type collapse!? Cyprus bail out mere $13bn. Our banking system is not so weak as you think. As of now, even if the overseas corporate debt of say $170bn is outstanding, most of them on strong footing, apart from exposure not hedged can impact the balance sheets. To some extent some are feeling the heat.

You are only restricted to domestic financing. What about overseas advances by banks foreign branches? Bad assets 43%, gross NPA’s, March’13 1.76%, the borrowers, most Indian co’s, are subjected to the regulations, not lax as in India.

Why can’t you question Rajiv Takru, how MoF directs the banks as per its wishes right from sanctioning to disbursement & continuation & if need be throttles the constituent member.

When GM’s to be promoted as ED’s can score only 1mark out of 30 in personal interview, can be appointed who are third in the hierarchy, it makes a talking point. Of course the decision is pending tho' they have good ACR or virtually 100%.

However , its pertinent that NPA’s are to be got down, mercilessly SARFASEI Act implemented & NO POLITICAL INTERFERENCE TO BE TOLERATED?

We will be required to infuse about 5trn in the next five years, Basel III norms & if profits erode fresh capital required to be infused to expand assets. Another aspect of mergers is yet not considered. Today SBI has demanded 4KCR to be infused. Why?



3 years ago

We are faced with twin problems/ causes for the mounting NPAs in the Banking industry. We have looked into the issue from the Bank's point of view but have ignored to examine the same from the borrower's point of view. We are presently faced with financial instability and that has affected the production cycle and planning. The falling rupee, inflation and visible panic of stock market has created uncertainty in the minds of the borrowers too with the consequence the production has been affected. We need to address the issue from the borrower's point of view. Secondly, the uncertainty has affected the cash flow by debtors and creditors. The Banks should immediately step in and take steps to tighten their monitoring system so that timely action is taken to obviate chances of loans going from bad to verse. The health of the Banks depends on the status of their NPA and it is for the Bank's Management to take a close look to maintain their working within acceptable parameters.

Dr Anantha K Ramdas

3 years ago

Very thought provoking article but what worries me is that if the government owned banks themselves allow such malpractices, no one save the situation going out of control.

Having worked in a bank, in the loans and advances department, long time ago, I now realise that, truly speaking, employees themselves are aware of the "hanky pranky" practices and favourtism extended to some clients by Branch Managers themselves, within their "discretionary powers".

Somehow, government need to encourage whistle blowers here and reward them, who can help to prevent these happening.

Personal integrity plays a vital role and only then the news can "leak" to the right sources.

Thanks Mr Kini for your article.


3 years ago

good article


nagesh kini

In Reply to raj 3 years ago

Thanks Raj!
All that comes as a result of four decade long experience travelling up and down from Kashmir to Kanya Kumari conducting bank audits!

Gitmo soldiers get 9/11 history lessons

Twelve years after the 9/11 attacks, the FBI tries to remind soldiers at Guantanamo who they are guarding

Young soldiers at Guantanamo Bay would have been in grade school when the 9/11 attacks occurred. But the government is making sure the terrorist attacks are fresh in their minds.

The Federal Bureau of Investigation (FBI) now holds briefings for military personnel stationed at Guantanamo about the attacks and their connection to the island prison. Five detainees are currently being tried for their role in plotting 9/11. There are 161 other prisoners there too, about half of whom have been cleared for transfer.

The presentation includes details about the hijackings, videos of the World Trade Center, and recordings of 9-1-1 calls from the towers.

We received eight pages of the FBI’s 17-slide PowerPoint presentation after filing a Freedom of Information Act request. We filed the request after a Huffington Post report cited the briefings, saying they “left many participants in tears.”

FBI Gitmo Presentation



The presentation is marked “law enforcement sensitive,” and the FBI said they withheld nine slides to protect law enforcement tactics.

The audio and video clips used in the lessons were originally exhibits from the prosecution of Zacarias Moussaoui, currently serving a life sentence in federal prison in Colorado for his role in the attacks. (The clips are stored at a court website, which advises listener discretion.)

Spokespeople for the FBI and the military at Guantanamo did not respond to requests for more details about the briefings, so it’s not clear how often they are given, or when they started. The released slides also don’t show anything about current detainees, so we don’t know how the FBI relates them to 9/11.



Falling rupee and its counterfeit cousin!

While the rupee is touching new bottoms every day against the US dollar, the number of fake currency notes in India is increasing. Even the Security Press is printing blank notes. Can the new governor of RBI look at polymer currency notes?

Dr Raghuram G Rajan, Officer on Special Duty (OSD) at the Reserve Bank of India (RBI) Head Quarters in Mumbai, who would take over as the next governor on 5th September, has his plate full of woes.
Since his return to India, some two years ago, after a glorious innings in the US, and being an advisor to the Prime Minister, he is fully aware of what is happening in the country and perhaps has been drawing up plans on what needs to be done.
In the meantime, the current account deficit (CAD) kept growing and the Indian rupee kept declining in its value.  No doubt, both speculators and panic mongers have caused this damage, and the rupee, battered and bruised, may touch the danger mark of 70 against the US dollar, before some radical changes are made.
However, the rupee is one of the many in Dr Rajan's full plate that needs to be tackled with care, and nurtured back to a healthy lifestyle. The intrinsic value (of rupee vs US dollar) is certainly in the 55 to 60 range, and not in the 70s.
As though the slide in its value is not enough to hurt its reputation, the rupee has a fake cousin that has been running around loose, harming the Indian economy. Cross-border terrorism from Pakistan, via Nepal and Bangladesh continues unabated, and the porous borders needs to be tightened by a totally independent force, as carriers or infiltrators seem to be able to cross with impunity, or with connivance!
The latest Reserve Bank report, annual at that, admits that a staggering 98,459 counterfeit notes of Rs1,000 denomination were detected, as against 83,280 last year.  Since counterfeit notes have been detected in Rs500 denomination also, all banks use note sorting machine to sort out the fakes from the real.  The customers, who do come across the fakes, unwittingly, are not penalized, but the banks have been advised to impound these notes so that it does not return to circulation.
We may digress for a moment to recall that, not long ago, just three weeks ago, RBI itself received a total of Rs970 crore of blank currency notes from the secured vaults of its own press. Efforts by media to investigate this lapse further did not yield any result, except to know that these printing presses do not have adequate safes to keep the stock.  Apparently, a few million here or there won't make a difference! There has been no further info on this unfortunate lapse.
But what is the urgency in raising this issue of counterfeit currency now?
At Moneylife, we have raised this issue of counterfeit currency notes from time to time.  We have detailed how a number of countries have switched over to polymer currency notes, instead of paper. Paper currency notes have a shorter lifespan, are relatively easy enough to fake, cannot be detected by layman, and can cause huge inflation, besides being an instrument to aid terrorism and can, on the whole disrupt the growing economy.
To counter this, RBI, in fact, did a market testing of polymer currency notes in some two-tier cities, but the full details have not yet been made public.  There is no further news as to when they, if at all, plan to introduce the same in our country?
In the meantime, after a great amount of opposition, the Food Security Bill has gone through; efforts are now being made to streamline and overcome power generation obstacles; an enormous increase to the price of gas have been accepted.  These are all signs to indicate an imminent announcement for general elections.  Unless we have a major military problem in the borders, it is likely that such an announcement is likely before the year is out.
We need a clear-cut announcement from the RBI, and that too from the new governor, as a part of his policy statement, as to when polymer currency notes are planned to be introduced in the country?

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


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