NPA - when asset becomes liability !!

A country’s health is measured by its wealth, its assets. The general perception is something like more the assets, more the nation will be able to progress by leveraging those. However those assets need to perform to their fullest ability as well. Loans disbursement is considered as a major source of revenue for banks but sometimes those loans turn bad i.e. borrower is not in a position to pay back neither the loan nor the interest for more than 90 days. In other words it ceases to generate income for the bank, and then the money given out in the loan becomes “non performing asset”.

A close look at NPA...

Inability in repayment of loans can be due to multiple reasons from the borrower’s point of view. A study by Associated Chambers of Commerce and Industry of India (ASSOCHAM) shows gross NPA as on September 30, 2013 was Rs 2,29,007 crore, 27 per cent higher as compared to Rs 1,79,891 crore as of March 31, 2013 for the 40 listed banks. The study also pointed out the condition of public sector banks is worse than that of private sector banks due to both internal and external factors. (Source: ‘Banks non-performing assets likely to rise further in 2014: Assocham’ Economic Times, dated 31st Dec, 2013). Public Sector banks are getting affected more because they are under the government obligation to lend out more to small and medium scale industries which end up faltering during repayment of loans. The recent debacle of United Bank – nonperforming assets soaring to 10.82% as a proportion of total advances and the sudden exit of the bank’s chairman and managing director Ms. Archana Bhargava is one of the glaring examples of the problem. The bank has suspended all lending and asked a bailout from the government.

Don’t Eliminate – Manage!

It is more prudent to manage NPAs rather than eliminating it completely.

There is a certain set of guidelines laid down by RBI which many times are not being adhered to. There are a certain norms for income recognition and asset classification which ensures transparency but are not followed by banks. SWOT analysis needs to be done prior to disbursement of loans. Also RBI urged banks to ensure realistic repayment schedules on the basis of cash flows with borrowers. This will go in long way in improving the recovery in advances. The need of the hour is developing a pragmatic approach of focussing more on efficiency and transparency. RBI norms can set the directions, but its only up to bringing the horse till the well. It cannot make it drink water. The banks must show the alacrity to deal with the problems at the very ground level. But it’s not always the lack of rules; sometimes reasons may include time consuming nature of asset disposal process, postponement of the issue or manipulation by debtors.

"Economic policymakers require an enormous dose of humility, openness to various alternatives (including the possibility that they might be wrong), and a willingness to experiment," Raghuram Rajan, Governor of Reserve Bank of India wrote in a column on the Project Syndicate website. Mint Road’s own Financial Stability Report (FSR: June 2014), notes that gross NPAs fell to 4 per cent in March 2014 from 4.2 per cent in September 2013. The slip of decimal does give some glimmer of hope but India still has a long way to go. However there is one thing which needs to be pointed out at this juncture, we need to reduce NPAs but we cannot erase it out completely. There will always been some people defaulting on their loans unwillingly or willingly. So with proper regulatory norms and through awareness in customers, NPAs can be minimized to very low percentage but some will always be there. Another aspect of NPAs is handling of the properties which are mortgaged during loan disbursement. These properties are handled by ARCs (Asset Reconstruction Company). The pace with which bad loans are increasing, always exceeds the money in disposal with the ARCs. Also many banks do not resort to ARCs easily. Yes, transferring bad loans to ARCs will clear their balance sheet, but it would also mean admittance of failure to recover loans- a definite loss of face. India has 13 operational ARCs but they are not endowed with capital. In developed markets, ARCs are well capitalized to take care of bad loans. Rewards should be disbursed among bank employees who can recover loan amount- this will provide a motivation and a push to handle NPAs at the earliest.

At a stage when its only priority is growth, India cannot afford to have this burden of NPAs piling up. We talk of inflation, fiscal and monetary policies- these are no doubt very important, but dealing with NPAs is equally important. In 1974, Prakash Tandon — the first Indian chairman of Hindustan Unilever; and Punjab National Bank (PNB)— Committee came up with the concept of ‘maximum permissible bank finance’ — “not less than 25 per cent” of the working capital should be equity or quasi-equity. Norms like these are not possible in current scenario, but the whole idea is to have some kind of structure to deal with this menace. Again there is an issue of incorrect NPA calculation- banks cook up NPAs in balance sheet giving an unfair picture to the investors. This needs to be taken care of too.

Measures taken by other countries

India can always imbibe the measures taken by other countries and which have been proved to be effective as well. For example, in Thailand caps on foreign equity ownership you removed in financial institutions. Singapore is considering for a new ‘Omnibus Insolvency Legislation’ which is based on UK Insolvency Act of 1986. It mainly deals with a new corporate voluntary arrangement procedure. Japanese government infused capital into Resona Bank in Japan via DICJ (Deposit Insurance Corporation of Japan). The idea was unique because in this case DICJ bought common stock in place of preference shares by borrowing some 1.96 trillion Yen from banks. This set a precedent of replacing management as well as acquiring the stocks. So it’s high time for India to make sure the measures taken are innovative and effective to tackle the situation in India.

Signing off...

Yes the requirement is being a Houdini of a banker to give loans during tough times, handle NPAs, ensure all operational expenses are taken care of and then last but not the least maintaining the profit margin. When the stakes are high, the game has to be top notch. At the end of the day it is more of a perception on how to deal with it and your strategy. Chanakaya came up with the 7 pillars of business in ‘Arthashastra’: "The king, the minister, the country, the fortified city, the treasury, the army and the ally are the constituent elements of the state"- let this guide the restructuring of the assets in our country.

#NPA #Asset #Liability #Bank