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
9 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?

9 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
9 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.
9 years ago
good article
nagesh kini
Replied to raj comment 9 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!
Free Helpline
Legal Credit