Ordinary borrowers often complain about difficulty in getting loans, while some large borrowers just get it on a platter. This also highlights high operational risks associated with people and process that may be responsible for increase in bad loans or NPAs
Non-performing assets (NPAs) of the banks, especially public sector banks (PSBs), have been going up sharply recently. According to one of the estimates, the gross non-performing assets (NPAs) of listed banks rose 35.2% to Rs2.43 lakh crore during the first three quarters of the current financial year. In absolute terms, the 40 listed banks added Rs63,386 crore to their gross NPAs during the nine months till December 2013, with State Bank of India (SBI), the largest lender in the country, leading with an accretion of Rs16,610 crore. The rising NPAs have set the alarm bells ringing all across. The finance ministry has asked banks to work on ways and means of recovering NPAs at the earliest. Banks are busying chalking out strategies to recover money blocked in NPAs. While managing NPAs has become a cause of concern for banks, the reasons for rising NPAs are also being debated all across.
The rising incidence of NPAs has been generally attributed to the economic slowdown. It is believed that with economic growth slowing down and rate of interest going up sharply, corporates have been finding it difficult to repay loans, and it has added up to rising NPAs. Even finance minister P Chidambaram stated that bad loans are a function of the economy and hence, having bad loans during distressed times is very natural. But do bad loans rise only because of economic distress? If this was the case, almost all banks would have experienced similar kinds of bad loans in their portfolios. Public sector banks have performed badly on the NPAs front compared to the private sector banks. While the loan portfolio of these two types of banks may be different, the contribution of public sector or state-run banks in total NPAs does not justify this difference in the composition of loans.
So what is it that is causing burgeoning of NPAs? Is it the approach of banks towards loans, which is wait and watch approach or the credit sanctioning processes of the banks itself? Are there other factors as well contributing to the rise in NPAs? The wait and watch approach of banks have been often blamed as the reason for rising NPAs as banks allow deteriorating asset class to go from bad to worse in the hope of revival and often offer restructuring option to corporates.
Let us look at the wait and watch approach supplemented by restructuring offers of banks, which cause NPAs to rise. A Parliamentary panel, examining increasing incidents of NPAs, has observed that state-owned banks should stop “ever-greening” or repeated restructuring of corporate debt to check the constant bulging of their non-performing assets. Members of the panel were of the view that NPAs are the result of bad economic situation, but there were also management issue of every-greening of loans, which could be avoided by “not renewing loans, particularly of corporate”. This analysis clearly points out that banks’ approach towards NPAs has been a reason for aggravation of bad loans. Extending those extra helping hand can go against the financial health of banks.
Coming to the contribution of credit assessment process, banks need to be more conservative in granting loans to sectors that have been traditionally found to be contributors of NPAs. Infrastructure sector is one such villain causing NPAs to rise predominantly because of long gestation period of the projects. But more than all, this credit sanctioning process of banks need to go much more beyond the traditional analysis of financial statements and analyzing the history of promoters. There is a need to incorporate significance of economic factors in the credit assessment process. Also, banks need to evolve strategy through which defaulters are kept out of system unless they honour the previous payment. It is obvious that credit bureaus have failed to obtain this objective as their reports giving credit history of corporate have been inadequate in capturing repeated defaults by same borrower. The old defaulter often resurfaces by using a new name with a clean slate and banks find it difficult to track this ‘habitual’ defaulter.
Banks also need to look at operational factors causing increasing incidents of bad loans. Are the bank officers going beyond the traditional principles of lending? Are unfair practices also adding to the increasing incidents of lending? SBI has recently taken some steps in this regard. To ensure that the dealings of its officers are more transparent, SBI has asked its officials not to meet the borrowers, existing as well as prospective, at any location other than the bank branch. Whether this will be effective or not is debatable, however the fact remains that high operational risks associated with people and process is key contributing factor in increasing incidents of loans turning bad or into NPAs. Ordinary borrowers often complain about difficulty in getting loans, while some large borrowers just get loans on a platter. It is time for banks to have a complete framework in place to tame NPAs getting added because of operational risks.
has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)