Terrifying bad loan scenario

The NPAs can be avoided at the initial stage of credit consideration by putting rigorous and appropriate credit appraisal mechanism.
Terrifying bad loan scenario

With people sharing new year wishes with each other, it's really going to be a bad beginning of the year 2017 for those responsible for bad loans. The banks are fast complying to the directions of the Reserve Bank of India to clean their balance sheets of non-performing assets (NPAs) and even stressed assets (loans showing tendency of turing bad) by the end of March 2017. So, next three months (January to March) will witness aggressive loan recovery drives by banks to make the defaulters to adjust their bad loans, force customers to adjust overdrafts and over drawings and ensuring arrear instalments are squared before the 31st March. During this process, the defaulting borrowers will feel stressed and even can lead to their anger against the pressure and coercion from the side of the bank. 

Notably, Indian banking industry burdened with whopping amount of Rs. 6 lakh crore (As on June 2016) as Gross Non-Performing Assets (NPAs) is in shambles. Precisely, these bad loans are acting as termite – eating basic fundamentals of the banks. 

Why loans turn bad? Usually banks  quickly point fingers at the defaulting borrowers and held them responsible for menace of bad loans. But the story of responsibility doesn't end here. Banks too are to be blamed. They lacked interest in checking the deteriorating asset quality. Instead, resorted to ever greening to avoid recognition of bad loans. For all these years reports indicated hidden mess behind the declared financial results in most of the so-called 'strong banks'. In the calendar year 2016, most of the banks reported sharp rise in their NPA levels and many reported abrupt loss.

We have to understand that NPAs do not happen overnight. Loans are sanctioned through a process of appraisal of the proposal and credit worthiness of the borrower. More importantly, after the sanction, there is this duty enjoined on the lender to monitor whether the amount is being utilised for the appropriate purpose. Thus, those who approve the project report carelessly and fail to monitor such loans should ideally also be held responsible for the loans turning into NPAs. 

It's also a fact that certain changes in the policies of the government too proved one of the major reasons for creation of bad loans. The borrower is lured by the State and Central governments promising him all kinds of facilities such as land, power, infrastructure, raw materials, subsidies etc. But unfortunately many of these promises are often a mirage, contributing a great deal to the birth of NPAs. 

Meanwhile, banks too have a responsibility, as the recovery process has to be tailored within the legal framework and a line has to be drawn between the acceptable and the avoidable. Properly trained loan recovery officers following the RBI's guidelines in both letter and spirit, will definitely help to rebuild the confidence among borrowers. Sure enough, there might be some wilful defaulters also. But punishing all other defaulters along with the wilful defaulters should be avoided. It may also be noted that collateral security by way of mortgage of immovable property or other fixed assets always reminds the borrower to pay the dues to the banks. However, it is also important that  banks should not resort to unrealistic terms and schedule of repayment.

The follow-up measures taken by the banks regularly and systematically will help to keep the borrowing unit on their alertness and guide them to rectify their mistakes. This would also be a helping hand in tiding over their tight times. Normally, such close follow-up programs are conspicuous by their absence. In the result, the borrowing units ignore payment of their dues to the banks. 

Performance of the borrowing units, if carefully and systematically monitored through regular inspections by scrutiny of returns, annual balance sheet and inspection of site, can be significantly improved. Naturally, such inspections prevent the borrowers from deviating from the terms and conditions of the loan or from diverting any fund for purpose other than those earmarked in the sanction letter and keep the financial health of the businesses in good order.

So, to be precise, to solve the problems of existing NPAs, quality of appraisal supervision and follow up should be improved.  The NPAs can be avoided at the initial stage of credit consideration by putting rigorous and appropriate credit appraisal mechanism.  

Here it is essential to enforce the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. 

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