Can RBI’s policies alone tackle rising NPAs deftly?
Abhirup Ghosh 20 March 2014

RBI’s initiatives to curb NPAs are good and would help minimise the stress. However, given the past record on a number of failed reforms, one question arises – can the regulator alone be able to tackle rising NPAs deftly?

Good health of banks is critical to the health of the economy and is a pre-requisite for the overall economic development and financial stability of a nation. An ailing banking sector indicates distress in economy as well and over the last couple of years, the banking sector is weighed down by the ever increasing non-performing assets (NPAs).
 

One can justify this rise in the level of NPAs through a number of reasons like, a) impulsive implementation of law by regulators b) policy changes happening dynamically c) infrastructure sector being in a deadlock, d) overseas investors becoming sceptic about making investments in India due to the sluggish economic condition prevailing in the country e) political uncertainty prevailing in the country f) now that the US economy is reviving from the economic slowdown, the money is flowing back there from India.
 

The Reserve Bank of India (RBI) along with the other regulators, has constantly been trying several policy reforms to deal with the rising NPAs with not much impact.

Looking at the current market scenario and various steps taken by RBI, it would be interesting to see, how bad loans can be minimised.
 

Current market scenario-

One can easily make out the amount of stress prevailing over the financial system after 40 listed companies together reported the growth of Rs2.4 lakh crores worth NPAs  during the quarter ending on December 2013. While this has been the overall scenario, some of the banks individually have made it to the headlines by reporting huge amount of NPAs in the December quarter. In terms of quantum, the State Bank of India (SBI) reported highest NPAs worth Rs67,799 crore. However, it is Bank of Maharashtra and United Bank of India, which made the headlines by reporting a growth of 209% and 188%, respectively in NPAs. Even one of the recent releases by RBI  also highlights the growing concerns over NPAs within the country. The table below would show us the trend in the gross advances by the banks and the gross NPAs since 2001.
 

End of March

Total Gross Advances

Gross NPAs

Growth in Gross Advances (%)

Growth in Gross NPAs (%)

(Amt in Rs crore)

2001

522,365

62,896

-

-

2002

645,865

71,113

23.6

13.1

2003

739,125

70,042

14.4

-1.5

2004

859,092

63,538

16.2

-9.3

2005

1,125,056

58,024

31.0

-8.7

2006

1,473,723

51,243

31.0

-11.7

2007

1,893,775

49,997

28.5

-2.4

2008

2,331,750

55,695

23.1

11.4

2009

2,788,424

68,216

19.6

22.5

2010

3,264,907

81,808

17.1

19.9

2011

3,992,145

94,121

22.3

15.1

2012

4,666,337

137,102

16.9

45.7

2013*

5,371,151

183,854

15.1

34.1

* As at the end of September, 2013

Source: RBI

This scenario was seemingly favourable till 2007, thereafter the gross NPAs started rising and got worse as years passed, reaching 45% in 2012.

However, RBI from time to time has taken various initiatives to curtail ever increasing NPAs.
 

RBI measures to control NPAs in recent times

Over the last few months, RBI has brought in various reforms in order to control the growing NPAs both for the banks and the non-banking financial companies (NBFCs).
 

(i)Increase in FDI cap for ARCs:

The RBI, in order to promote the business of asset reconstruction in India, increased foreign direct investment (FDI) cap on asset reconstruction companies to 74% from 49% under the automatic route. It also allowed the foreign institutional investors (FIIs) to participate in the equity of the ARCs, however, the maximum shareholding by FII cannot exceed 10% of the paid up capital of the ARC.
 

(ii)Framework for Distressed Assets:

This is one such framework, through which the RBI has tried to bring in a number of changes in order to stabilise the current stressed out situation in the economy. It has concentrated more on early recognition of stressed assets as requires the banks and financial institutions to route the assets through three classes of special mention accounts-SMA (SMA-0, SMA-1 and SMA-2) before finally classifying it as a NPA. It also requires the all lenders with respect to the borrower classified under SMA-2 to form a joint lenders forum (JLF) whereby they are to formulate a corrective action plan in order to remove the stress over the asset. This framework also requires the formation of a Central Registry of Information on Large Credits (CRILC), which will be responsible to accumulate the data relating to the borrowers having aggregate fund based and non-fund based exposures worth Rs500 crore or more from the banks, non-banking financial companies- systemically important (NBFC-SIs) and NBFC-Factors. There are various other things that RBI has brought forward including the requirement of a proper credit risk management mechanism within the organisation.
 

(iii)Central Registry of Information on Large Credits (CRILC):

The main intent of setting up this registry was to keep a record of the large borrowers and those which are under stress. The RBI requires all the banks, NBFC-SIs and NBFC-Factors to report all the data relating to the borrowers having an aggregate fund based and non-fund based exposure of Rs500 crore or more or of such borrowers who have been classified as SMA-0 in the books.
 

(iv)Corporate debt restructuring norms for the NBFCs:

Earlier, the NBFCs were not allowed to be part of the corporate debt restructuring mechanism under the corporate debt restructuring (CDR) cell, but with this notification, RBI has now allowed the NBFCs to restructure their assets under the CDR cell and made their restructuring regulations at par with that of the banks. This has created a lot of buzz in the NBFC sector and it is believed that RBI has made this move in tune with the soaring concerns over NPAs. Henceforth, the NBFCs will be able to restructure their stressed asset either through one on one arrangement with the borrowers or along with other lenders through the CDR cell. Through this notification, the RBI has brought an incentive for the NBFCs, whereby they can retain their “standard” assets in the books even after restructuring, only if it is able to implement the restructuring scheme within a period of 120 days from the date of receipt of application for restructuring by the NBFCs. This incentive may encourage the NBFCs to restructure the stressed assets and make an effort to make them good. However, this special incentive is available with the NBFCs only till 31 March, 2015.
 

Apart from the above measures, the RBI earlier came out with several other such reforms, however, still it could not get the control over the rising NPAs.
 

The misses by policy makers?

In spite of so many measures, NPAs still remain to be a matter of concern for all. The reason for such an uncontrollable situation is the lack of practicality in policy making. The main check should be implemented at the initial stages of a transaction – strict credibility criteria and guidelines for implementation for the same should be formulated by the RBI itself, instead of relying on the board of the respective financial institution. This would ensure that the money lent goes to the right hands. The policy makers should try to make good use of the ARCs. Currently, there are only 13 ARCs existing in India of which not more than two-three are active and given the amount of non-productive loans in the economy, this number is very miniscule. The RBI should promote ARCs more and try to utilise this in order to utilise the collateral backing the stressed assets. These ARCs, if utilised properly, can actually turn out to be very strong measure of control for the policy makers in future.
 

Considering the number of reforms by the policy makers in order to reduce the NPAs and the number of misses being more than the hits, they should now shift their focus on asset creation as well. In the IFC’s Doing Business Report, 2014, India stands at 134th rank among 189 economies across the world in terms of ease of doing business in India, in spite of the enormous size of the economy. This indicates the need of an enabling and facilitating environment for doing more business in the country. The only other thing, apart from reducing the NPAs, which the regulators have concentrated upon in recent times, is the clogging of the scams with reactive law making, which in turn has affected business generation adversely. The Companies Act, 2013, with stringent penal provisions, stands out to be a clear example of reactive law-making by the country. In the times to come, doing business is not just for the corporate sector. For the professionals, it would be the most daunting task ever. A lot of problems will be taken care of, if the regulators look forward to create new avenues of revenue generations of the businesses, so that the sick ones can be revived.
 

The rise of the NPAs is a clear indicator that the Indian corporate sector is much on incubator and the intentions of the policy-makers do not seem like the recovery of the India Inc. 
 

Most of the policies by the RBI, have come after banks reported their disastrous third quarter results and the impact of these reforms will be understood only after the next set reporting by banks. Though initiatives taken by the RBI to curb NPAs are good and would help minimise the stress within economy, given the past record of the number of failed reforms, only one question arises – can RBI’s policies tackle rising NPAs deftly?
 

(Abhirup Ghosh is research analyst at Vinod Kothari & Company)

Comments
Yerram Raju Behara
1 decade ago
When one decomposes the NPAs we would know what the India Inc and PSUs contributed to this monster. Second, why would it take years for the banks to charge the known willful defaulters like the Kingfisher? Banks too well know that when the attack the big wigs who indulge in the luxury of near-nude blondes on the annual calendars, fashion shows, car and horse races, acquisitions of foreign firms, diverting the gold pie of bank credit in the naked eye of the regulator, the Chairman would be in trouble. He passes of his time by making lofty announcements. The regulator only send paper tigers to convene consortia meetings and arrive at CDR package for such large scale diversions. The Courts give adjournments after adjournments finally to halt the attachment and sale of the defaulter properties!!
These are no reasons for Banks to themselves default on due diligence processes and keeping their records straight and this has been truly the casualty during the last decade.
Both the Government and the RBi are represented on the Bank Boards that accumulated these NPAs. What queries have been raised in the Board Meetings by these representatives? Their mouths are perhaps so full for the half day or day with cashew and sweets and mouthwatering lunches and happy retreats and occasional private gifts, that kept their mouths unopened and hands not to scribble. Credit Risk management, poor governance are to blame for the remedies in time and not always the distress in the economy.
Hemlata Mohan
1 decade ago
Regardless of the measures that RBI or the Government bring in, if the business climate of a country is not suited to entrepreneurs, the NPAs are going to stay. Where is the incentive for a businessman to stay honest?Why is it that even after 65 years of independence, it is so difficult to set up even a kirana shop and stay competitive? For PSBs to hold 75% of the country's business where is the freedom to say "no" to projects like Kingfisher, Lanco Infratech etc.?And by chance if the officials do make a genuine mistake inn granting a loan, where is the security blanket to keep them away from CVC and CBI?
S K Nataraj
Replied to Hemlata Mohan comment 1 decade ago
I am in full agreement with what you have said. The CMD's of Banks get away, while the others ( lower ranked officials) are made sacrificial goats. As long as the fear of the CVC dangles like a damocle's sword , bankers can never perform without fear, I.e. The honest ones, I mean. What you have said of industrialists reminds me of the ever popular saying in banking circles that " only the industries are sick, the industrialists are healthy, and in the pink of health." What a tragedy that cases like those of Ketan Parekh continue to drag on for years and years, while that of Nick Leeson of the famous Barings Bank case was not only over, but he he has served out his sentence as well. Our judiciary also is badly in need of reform. The sooner we change, the better for our future.
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