Tough measures needed to recover mounting NPAs of banks, say experts
Public sector banks (PSBs) are essential to ensure harmonious economic development, be it agriculture sector, rural development, employment generation, reduction in economic disparities, and removing regional imbalances. However huge bad loans in banks is a huge problem and without taking tough measures to recover non-performing assets (NPAs), all other steps to revive Indian PSBs would remain cosmetic, say experts.
 
Speaking at National Banking Conclave organised by All India Bank Employees Association (AIBEA), were experts like SP Shukla, former Secretary of Govt of India, senior advocate of the Supreme Court, Prashant Bhushan, journalist P Sainath, economist Dr Prabhat Patnaik, CVR Rajendran, Managing Director of Catholic Syrian Bank, Dr K Nageshwar, former Professor in Department of Journalism at Osmania University, Dr Victor Louis Anthuvan, Professor-Finance and Dean for Research at Loyola Institute of Business Administration and Dr Yugal J Rayalu, Secretary of All India Progressive Forum.    
 
Delivering a lecture on ' The Mounting Problem of NPA- Who is the Culprit' at the conclave, Adv Bhushan said the battle against privatisation of banks should go beyond the fight by bank employees but they must ensure that stakeholders, especially their customers and common citizens are also involved. This shall alone ensure that this fight against privatisation and bad loans could be won, he observed.
 
According to Adv Bhushan stressed assets in banks exceed Rs15 lakh crore and more than 75% of these loans have been taken by the industrialists and crony capitalists.
 
P Sainath, a social activist and commentator,  while speaking on ''People's Money for People's Welfare- Not for Corporate Loot' expressed concern about data manipulation in banks. He said, "Bank data is being fiddled with and banking correspondents are being treated like a branch. Mumbai and its suburbs get 53% from NABARD's credit plan, which however, does not go to agriculture but to agriculture business. State Bank of India (SBI) is providing agriculture loan at 16%, but doling out car loans at 7%."   
 
The experts also felt that bank employees have to remain vigilant against the mindless implementation of reforms as they are major stakeholders in the Banks and would be adversely affected if the same are not effectively resisted and repulsed.  
 
Dr Rayalu said political interference in bank administrations, exposing people's money to the vagaries of the politicians, the nexus of politicians, corporate and bureaucrat led to loot of people's money. Explaining that banks deal with wealth of the nation and circulation of money, Dr Rayalu said this wealth is created by farmers, manufacturing units, cottage industries, small and medium enterprises, besides large industries. But the producers of wealth, he said, for example agricultural sector in India, small and marginal farmers are at the mercy of the landlords and money lenders. In the manufacturing sector, large corporate houses get all the facilities while the small and cottage industries remain neglected, he added.
 
On the issue of proposals for merger of banks, the experts opined that it is hardly a remedy to the present problems of the banking sector and would only add to the woes of the Banks. 
 
Dr Patnaik said the society must control to whom the credit goes to ensure socio-economic development and added that this was the reason why the banks were nationalised. Every financial sector creates a bubble when it is targeted against the social good, which bursts over a time and causes the financial sector crisis, Dr Patnaik said, adding withdrawal of the credit from the petty productions such as small traders, small and medium industries, agriculture, and priority sector would lead to crisis.
 
Dr Nageswar said that the concept of profitability of public sector banks and private sector banks cannot be equated. "The social agenda of the governments are being carried forward by the lending by the public sector banks. So, when there has been a social lending, which are done at a lesser rate of interest, it cannot be compared to that of business models of the private sector banks operating in India," he added.
 
CH Venkatachalam, General Secretary, AIBEA said the lectures delivered by the various eminent speakers would help the Association to formulate its views in the ensuing future campaign programme.
 
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    COMMENTS

    sprout

    3 years ago

    Dis honest persons in the helm of affairs as a TEAM are responsible for playing with the public funds.whereas they have to act as Trustees. Figures are cooked by experts,in the feasibility studies, Every person handling loans and credit facilities must touch his heart and soul and follow the morals and ethics,Every one of them are jointly and severally liable for theNPA. Loans once given are not followed up on a regular basis as in the case of the famous Airlines for which we all running after and getting delayed to get back the amounts.Every person no matter who he is, the CPA, or fin.consultant , the bank branch manager, the investigator and the credit committee and also the RBI who is supposed to take care of the Country's security and investors and customers security must supervise and report in the newspapers and also bring it to the knowledge of the Finance ministry and in the media to make it public to know what and who are behind this atrocity.Out of proper scrutiny and on reasonable grounds on a fair and equitable basis if the loan has been granted and proper follow up has been continuously done, then also if there is aNPA not more than 2 or 3 percent of the total amount due can be written off on a long terms basis of 5/7 years.But the onus and burden lie on the officials handling these affairs.
    Loans are granted by a single manager or authorized person. He is transferred the person who takes over finds it difficult to go further.Every person must work sincerely and save the investors and our country as a whole.

    B. Yerram Raju

    3 years ago

    All the tough measures go to squeeze the small - SF, MF, Micro and small enterprises. 1. Faulty appraisals should be gone into detail. 2. Erring and colluding officials should be punished in glaring public eye. 3. SARFAESI Act should be amended to prevent sale of household assets of less than Rs.10lakhs in semi-urban areas and Rs.15lakhs in rural areas if that were the only asset with the borrower. 4. Banks should first exhaust the sale of primary security and then proceed to the collateral security. 5. Banks should be mandated to banking and stop selling the insurance and mutual funds. 6. Union and State Governments should stop using bank lending as substitute for bonanzas. 7. Parliament should decide not to allow write-off of any type of loan other than those affected by severe natural calamities and all such write-off should also accompany further lending to the affected persons -from farm to fork and to house repairs to house building at such interest rates that should get amortized for repayment with principal over a minimum of 5 years. 8. All Corporate debt beyond Rs.100cr should be subject to half-yearly scrutiny sector wise and policies that are impinging on the sector behaviour should be corrected and the Corporate entities should be enabled market correction. 9. All MSMEs who are vendors to the Corporate entities should be provided equal reprieve to that of the latter. 10. Incentivize good lending practices and honor the banks that perform annually but not cosmetic.

    REPLY

    B. Yerram Raju

    In Reply to B. Yerram Raju 3 years ago

    sorry for the mistake. Point 3 should be read as value of household assets of Rs.15lakhs in urban areas and not in rural areas.

    Viveak Arya

    3 years ago

    In my personal opinion There is need to understand the cause of npa. black sheep and other needs to be segregated. bank are also doing business like any other industry . there is economic upheaval which is going on . All are suffering . all data shows slowdown lack of demand loss of jobs no new investments alarming increase in cost after gst in many products. Industry is still aligning to new policies and need nursing to survive and then grow. tough stand at this juncture is killing entrepreneurship. .e,g on launch of gst alone business cycle is disturbed which is typically 4 month for sme . Npa definition is 90 days overdue which speaks why npa mounting . There is need to align these npa guidlines too during these peroid like they are doing on gst return filing system as not ready so is the industry require time to adopt to new system and grow with these new policy ,

    SuchindranathAiyerS

    3 years ago

    How can you undo nearly fifty years of Staet ownership and Neta-Babu-Cop-Milard-Crony-Presstitute Corruption of Indian banking?

    Bank Recap: Another Half Step
    On 24th October, the ministry of finance announced a bank recapitalisation programme that would put Rs2.11 lakh crore into public sector banks (PSBs). Of this, banks will get Rs18,000 crore directly from the government under the Indradhanush programme; they will raise Rs58,000 crore from the market and the government will pump in Rs1.35 lakh  crore through recapitalisation bonds. The rating agencies, business community, fund managers and analysts have all heaved a sigh of relief that the heavy weight bad loans have been lifted from the PSBs which had been caught in a vicious cycle. PSBs have accumulated close to Rs10 lakh crore of bad loans, or 12% of their loans & advances. They have no incentives to go after the defaulters. The government, that is, the ministry of finance, does not have the time and resources to go after banks which they part-own and fully control. If PSBs write off these loans, their net worth would be wiped out and they would not have been able to make fresh loans which, in turn, would mean poor economic growth. Poor growth would mean more bad loans.
     
    To break this vicious cycle, the government has announced a recapitalisation plan. Unfortunately, not only are the details of the bailout package unclear, there are no strings attached to it either. Such bailouts have been attempted earlier too; they give temporary relief to PCBs at the cost of taxpayers but the core operations, characterised by corruption and inefficiency, remain the same and go on to generate more bad loans. The absence of any conditions attached to the bank bailout is a surprising omission in a series of ineffectual steps the government is taking to revive PSBs. People had expected this government to make fundamental changes in the way PSBs operate;  their expectations have been belied.
     
    Fixing the PSB mess was perhaps a priority for the prime minister Narendra Modi in 2015; just seven months after he assumed power, the finance ministry organised a two-day retreat branded ‘Gyan Sangam’ in Pune on 2-3 January 2014. The gathering included the who’s who of banking: heads of all public sector banks and financial institutions, the finance minister, Raghuram Rajan, the then governor of the Reserve Bank of India (RBI), the then minister of state for finance Jayant Sinha, and top officials of the finance ministry, including the finance secretary and financial services secretary. Mr Modi interacted with bankers on the second day of the retreat, “in an attempt to achieve a broad consensus on what has gone wrong and what should be done both by banks as well as by the government to improve and consolidate the position of PSBs.” Foreign consultants made long presentations. Finally, nothing came of it. A second Gyan Sangam was held the next year, but it was a damp squib. Far from becoming competitive, profitable and customer-friendly, PSBs sank further in the morass of bad loans as they were kept busy with opening Jan-Dhan accounts and, later, demonetisation. Many remained headless for a long stretch. 
     
    Then, on the eve of Independence Day in 2016, the government launched Indradhanush, a seven-point programme to rejuvenate PSBs. The plan covered better senior appointments, setting up a Bank Boards Bureau (BBB), pumping in more capital, reducing bad loans, empowering the management, improving accountability and better governance. Indradhanush did not work either. The government has done a few things that were easy to do, but have little connection to the core problems that beset PSBs: one, some top-level appointments, two, more capital and three, setting up BBB. Four other components of Indradhanush remained on paper: reducing bad loans, empowering managements, improving accountability and better governance. These objectives have been discussed and debated by many committees in the past.
     
    No Accountability Fixed So Far
    Even as more capital is injected into PSBs, shouldn’t someone be held accountable for the huge mess? RBI’s role involves framing banking policies, implementation of plans, banking supervision and senior appointments. It receives scores of reports from banks, conducts regular inspections and nominates directors to bank boards. Despite this, PSBs are in a mess. What has RBI done with the reports that banks are asked to submit? Did its inspections report nothing suspicious about the dubious loans that turned bad? What role did the RBI-nominated directors play even as banks kept lending recklessly? Who in RBI is responsible and accountable for all this? If no one is accountable, how do we make RBI primarily accountable as the banking regulator?
     
    Then come the banks. The spread between the average deposit rates and average lending rates (known as spread) in India is one of the highest in the world, making banking a highly profitable business. If banking is a profitable business, why do PSBs need such repeated bailouts? The average ratio of bad loans to advances of PSBs is 10% while the average ratio of bad loans to advances of the five largest private sector banks is 1.5%. Why are bad loans six times higher in PSBs? From the RBI governor to bank officials and ministers, everyone says that India needs better bankruptcy laws (we now have it). Why were operations and profits of private sector banks not badly hampered because of weak bankruptcy laws?
     
    Bankers are supposed to be cautious people. Indeed, small businessmen tell us that it is very difficult to borrow from banks, without offering collaterals and personal guarantees that are several times the size of loan. Banks also arm-twist businessmen to buy life insurance if they want a loan. If bankers did their due diligence correctly and acquired collaterals and guarantees in excess of the loan, why is recovery so difficult when the loan goes bad? If loans have gone bad on such a large scale, is it correct to conclude that banks have not done the basic job of lending and appraisal correctly? The inescapable conclusion is that behind the colossal bad loans lies corruption and gross inefficiency. But how many bankers have been held accountable for this?
     
    The Solution
    Lending by PSBs is fundamentally flawed. If the government continues to control these banks, how can we reward exceptional bankers and punish the corrupt and inefficient ones? The Narendra Modi government came to power in May 2014. The same month, the PJ Nayak committee (Committee to Review Governance of Boards of Banks in India) submitted its report to RBI. The report was widely hailed as a fine roadmap for PSB reform. Sadly, the current government has not picked up anything much from that report. The core problem with PSBs, as the Nayak committee saw it, is this: “Governance difficulties in public sector banks arise from several externally imposed constraints. These include dual regulation, by the Finance Ministry in addition to RBI; board constitution; significant and widening compensation differences with private sector banks; external vigilance enforcement  through the CVC and CBI…”
     
    The solution suggested by the committee was: “If the Government stake in these banks were to reduce to less than 50 percent, together with certain other executive measures taken, all these external constraints would disappear. This would be a beneficial trade-off for the Government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully. It is a fundamental irony that presently the Government disadvantages the very banks it has invested in.” 
     
    Every solution thought by the government, skirts this core problem and does not come anywhere near this elegant solution. Each government has been conceited enough think that it can set things right. Instead of trying to set things right, we should have a system that automatically prevents wrong things from happening. This is precisely why the Nayak committee had suggested that the government bring down its stake which would eliminate a host of issues automatically. Quite the opposite has happened again—government stakes are going up in the process of recapitalisation, without any strings attached.
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    COMMENTS

    B. Yerram Raju

    3 years ago

    Before recapitalization, sell off the inefficient and perpetually loss making PSBs and not merge them with the efficient.

    Karthikeyan

    3 years ago

    Thanks. Every article from core moneylife team is worth the time spent.

    Banks Recapitalisation - I: The Need is Rs5 lakh crore to Meet Basel III Capital Norms
    Post demonetisation, banks were flush with funds and yet credit did not pick up. The blame was on the surging non-performing assets (NPAs) that killed the risk appetite of banks. The whole country is now aware that NPAs of corporate borrowers is the villain of the piece. Banks for once stopped blaming the priority sector for the unsustainable level of NPAs. Public sector banks (PSBs) dominate the NPAs and therefore the finance minister has announced a recapitalisation of the order -- never seen before at Rs2.11 lakh crore. To call these reforms is a travesty of judgement. The average taxpaying person has to swallow the poison. It has the potential for moral hazard.
     
    NPAs are integral to banking operations. No lender is immune from bad loans. The World Bank Development Report has recently published some data on non-performing loans as a percentage of total loans. (see the table and graphs below) In a dynamic and growth oriented economy, NPAs do occur in spite of every prudence and this should be given a treatment conducive to reducing their impact. Global economic pressures, inflation and policy drifts in the domestic economy make their liberal contribution and the solution lies with the vigilant banks.
     
    Percentage of Non-performing loans to total loans
     
     
     
    Greece takes the topmost slot with 36% NPA ratio while the next is rest of South Asia with India in the close to double digits. High-income economies fared significantly better barring the recession battered years during the last 15 years. Countries that received aid from international agencies have high NPA ratio with Europe and Central Asia no exception. India that performed well on this front till 2012 deteriorated year after year. 
     
    Risks of loss resulting from inadequate or failed internal processes, people and systems, broadly classified as operational risks enhanced. Strategic and reputational risks also increased with Mallya-like cases surfacing and just 12 corporate undertakings contributing to more than a third of the total bad debts.
     
    The regulator says that it has been doing all that it could to control the problem, like corporate debt restructuring (CDR), special treatment to the Special Mention Accounts (SMA), cleanup of balance sheets, and higher provisioning norms during Raghuram Rajan regime as Governor, of Reserve Bank of India (RBI). Yet, the Financial Stability Report (2017) mentioned that ‘the banking stability indicator worsened between September 2016 and March 2017 due to deterioration in asset quality and profitability,’ notwithstanding the strong fundamentals of the macro economy. Financial stability has critical influence on price stability and sustained growth. It facilitates efficient transmission of monetary policy actions. More importantly, it safeguards the depositors’ interests and ensures the stability of the financial system.
     
    While the lately introduced Insolvency Bankruptcy Code (IBC) has a potential of success, it has no immediate consequence to remedy the situation and even the recent amendments to the code will have to wait for results to happen at least for a year as the resolution process itself has in-built mechanism to extend for 270 days. 
     
    While the owner has all the responsibility to replenish the capital, there is demonstrated failure on the part of Government of India performing the dual role of regulator and owner in taking timely corrective measures. The owner is blindfold to the reality. Ever since universal banking has been introduced, collateral damage has been done with the sale of non-banking products like insurance, mutual funds with banks incentivizing the staff for such effort, taking preference over the traditional banking products, viz., deposits and credit. Due diligence of firms, their partners, directors has become a casualty. Exposure norms have been redefined.
     
     
    Adding fuel to fire is the Basel III regulations that redefined the Expected Loss. 

     
    Based on these calculations, PSBs in India require capital infusion of a near Rs5 lakh crore due to their level of NPAs standing at over Rs7 lakh crore as at the end of FY2017. Indian Banks thus had adequate warning to comply with additional capital requirements by 1 April 2018. Can banks find this capital? If not, what lessons can we learn from another round of bank bailouts with taxpayers’ money? Some years ago, there was a proposal in RBI to set up a Precautionary Marginal Reserve Fund, which could have been used to deal with capital erosion. More on that in the second part.
     
    (Dr B Yerram Raju is an economist and risk management professional. The views are personal.)
     
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    COMMENTS

    Ramesh Poapt

    3 years ago

    fm to banks-'jeet hi lenge bazi hum tum, khel adhura chhute na,
    pyar ka bandhan, janam ka bandhan chhute na...

    Anup Sen

    3 years ago

    The entire episode of Recapitalisation of Banks is primarily some accounting jugglery. Let’s see the proposal:

    Step 1: Government will issue Bonds of Rs 2 lakh Crore and banks will pay this amount to subscribe Rs 2 lakh crore. (Government will get Rs 2 lakh Crore).

    Step 2: Banks will allot Shares to the Government for the same amount and Government will pay Rs 2 lakh crore to the banks. (Banks will receive back the amount as Capital).

    Up to this level of the transactions, any person with a minimum education of some basic arithmetic and common sense will agree that the Government is not paying anything to the Banks.

    But, some liabilities are there for both of them. The Government must pay interest on Bonds issued by them in favour of banks. Banks are also liable to pay the dividend to Government against the shares issued by them. If you compare, the government is marginally looser and as per the Secretary Finance the amount is negligible and as such would be almost ‘fiscal-neutral’.

    If our Finance Secretaries statement as published in all important financial newspapers, why we are spreading ‘wrong-information’ or ‘mis-information’ that so-called Taxpayers’ Money will be used to recapitalise the Banks.

    The line ‘’average taxpaying person has to swallow the poison' is thus completely out of context. In the news and editorials published by the financial newspapers the word ‘Taxpayers’ are used and the common people (and perhaps the authors of such stories) means to say Income Tax Payers with a clear undertone that country is being run with the amount of tax paid by the Income Tax payers only. They forget that 99.99% of the population is paying taxes to Government in the form of ‘Indirect Taxes’ (now GST) and its volume is much higher than the Income Tax paid by some privileged few. A person living ‘below the poverty line’ is also paying taxes to the government.

    sohan modak

    3 years ago

    Sac all hot seat holders in govt. owned banks and demote even those who have retired including the loud mouth lady former head of SBI. these persons have been fleecing us the the customers as SB accoaunt holders by arbitrarily by imposing penalties on minimum bakance and these are the persons and gtheir subordinate baboos who have sold the bank capital to loan scavengers like sugar barons, industrialists and real estate builders who have no market comprehension.

    REPLY

    T.c. Shivswamy

    In Reply to sohan modak 3 years ago

    Where is the question of demoting officials.Most of these officials even after retirement find high positionsin private sector whom they have favored. Former MD of SBI Mr Nambiar who had favored Galadhari Brothers in Dubai got High Cushioned Jobs along with their fellow fofficials in Galadhari concerns.SBI suffered huge losses due to loans given to Galadhari cpmpanies.

    T.c. Shivswamy

    3 years ago

    Capital Stabilization Fund like a Sinking Fund for the Banks should have been introduced along with Governmentalisation Of Banks. Also Government must have introduced Petroleum Prices Stebilisation Fund to stebilise Petroleum Products prices as they are highly volatile. Public Sector Banks were used by politicians to mobilize their vote Banks.Now we are seeing the result.Comparing with other Developed countries with our over populated BPL families will not be sound.All loss making Public Sector Banks and Industries should be wound up instead of supplying Oxygen in the form of Budgetary provisions should be discontinued.There should be only one Mega Public sector Bank to aid the Government in its Developmental plans.

    Mohan Krishnan

    3 years ago

    There are two historically tested models.
    1. Sweden/Iceland model for making the banks pay for bad decisions and not the tax payers.
    2. Western/Japanese model to bailout banks through State Intervention.

    To follow the harsher method the Govt should be least corrupt and should have political will.
    But most Countries will choose softer option to kick the can down the lane thereby encouraging bad behaviour from banksters and the cronies.

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