Why panic on NPAs?
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Why panic on NPAs?

Indian banking industry for the last few years is in shambles and has totally failed to come out of the bad loan mess.

Banking industry is on the brink of disaster. This is what one can sum up  if the current debates on burgeoning level of bad loans, also known as non performing assets (NPAs), are taken into account. Basically,  discussing the problem of NPAs has been dominating the media headlines for years together now. But, we have rarely found  experts dishing out solutions to the problem.

Indian banking industry for the last few years is in shambles and has totally failed to come out of the bad loan mess. Default in loan repayments has remained rampant despite the fact the regulator, Reserve Bank of India (RBI), had set in motion a series of measures to arrest the menace of mounting bad loans. But the regulator simply failed as the banks over a period of time only accumulated their bad loans. 

Within a period of just two years the burden of bad loans has doubled as, according to the RBI data ending September 30, 2017, bad loans have jumped from Rs. 4 Lakh crores of 2015 to over Rs. 8 Lakh crores. Major contributors to this mess remain Public sector banks (PSBs) with bad loans to the tune of Rs 7.34 lakh crore.

This bad loan scenario throws open two important questions. First, who is responsible for this menace? Second, is creating panic a solution to this problem? 

In the first case, banks are themselves to be blamed for this situation. They haven't shown interest in cleaning the mess existing in their asset quality. Most of them resorted to ever greening and delayed 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'.

I have pointed out in my last few columns on the subject that after sanctioning and disbursing the loan, there is this duty enjoined on the banks 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. We have also observed that certain changes in the policies of the Government have proved the greatest 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.

A regular and systematic follow-up of loan portfolio by the banks keeps the borrowers on their alertness and guide them to rectify their mistakes. This helping hand helps them to tide over their tight times. Normally, such close follow-up programmes have  not been followed. 

Now, what is the solution to this problem? At least, creating panic cannot solve the problem. First of all, we have to understand that all bad loans are not wilfully created. It should not also be assumed that in all cases banks and borrowers were in hand-in-glove to defraud public money and had indulged in funds diversion. But there is need to acknowledge the risk factor in a market economy. It's important to differentiate between the willful defaulter and a genuine business failure.

Besides, the chest-beating over these bad loans needs to be stopped. Don't create panic by projecting that NPAs have broken the banks, when this is not true.  If we look at NPA scenario of past, the situation looks more grim than what it is today. Let me borrow some figures from RBI data. For example, NPAs from 1993 to 1998 show that the situation in those years was far more critical. The figures speak for themselves. Total NPAs: 23.2% (1993); 24.8% (1994); 19.4% (1995); 18% (1996); 17.8% (1997) and 16% (1998).

So the bottomline is that one should not panic on mounting NPAs. However, at the same time, banks should expose willful defaulters not through legal notices in newspapers alone, but they should track down their story of accumulating wealth through dishonesty in media so that public identifies such white collar criminals among themselves. Precisely, use the power of society in which a willful defaulter lives against him to recover banks' (public) money.

Meanwhile, the recommendations of the Committee on Petition, a parliamentary panel, to revisit vigilance mechanism in vogue in banks and at the same time asking the RBI to strictly enforce its guidelines pertaining to loans needs to be focussed. This can bring down, if not wipe out, the incidences of irregularities, malpractices, corruption, etc, at all levels in the functioning of banks.

(The views are of the author and not that of the institution he works for)

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