Banks need to discipline borrowers to contain NPAs

Nonperforming Assets (NPAs) are back in the news again. Gross NPAs of banking sector are likely to touch 5 percent in 2011 from 2.3 percent in 2008.In absolute terms; NPAs are estimated to triple by the year 2011 and would increase from Rs 55000 crores to Rs 1.9 lakh crores.

The Gross NPAs of public sector banks which stood at Rs 56473 crores in March 2002 came down to Rs 38968 crores in March 2007 and again increased to Rs 45 156 crores in March 2009.

They could reduce the NPAs during 2002 to 2007 because of the good performance of the economy, better recovery under SARFAESI Act, improved profitability particularly from treasury operations permitting banks to write offs, sale of NPAs to asset reconstruction companies and restructuring of assets as permitted by the regulator. The steep increase from the year 2008 onwards only confirms the worst fears of recession the economy experienced since the global financial crisis which triggered in the US since September 2008. Besides, higher rate of interest, failure of monsoon, high inflation, exchange rate fluctuations etc have added the NPAs .

Big Burden

Banks have umpteen ways to camouflage the NPAs; restructuring of assets is an officially permitted method they largely resort to. This helps them to make comparatively less provisioning and gain some time to recognize the problem.

However, the fact remains that NPAs continue to be a big burden and drain on banks’ resources affecting all stake holders who include, Government, good borrowers, depositors, investors and tax payers.

Banks’ provisions towards NPAs have also shown a corresponding increase during the year although they fall short of regulatory requirement stipulated at 70 % of bad debts. This regulation itself compels banks to underestimate NPAs , as more provisions mean less profit and consequential damage to the image.

Capitalisation

A good share of banks’ profit is earmarked to make provision towards NPAs and Government contributes a huge sum towards capitalization of banks at frequent intervals. The Government not only loses its dividend and also provides funds towards the capital of banks adding to its worsening deficit. The Government proposes to infuse a sum of Rs 16500 crores by March 2011 towards banks’ capital requirements.

Find Solution

As NPAs are like hidden bombs and it can burst at any time, banks have to discipline the borrowers and involve them in arriving at the solution to contain the NPAs. The approach of banks should be to rate the borrowers and levy a penalty based on the rating. This levy can form a corpus which if necessary can be supplemented by banks themselves. Over a period this fund will be equal to NPAs and banks are free from this menace with a strong balance sheet.

The present system of making provisions for bad debts and write offs affect the depositors, good borrowers, investors and all stake holders other than bad borrowers. This needs to be thoroughly reexamined. The loss to the exchequer and others is definitely avoidable.

Punishment should be for bad conduct of loan accounts by borrowers. When solution for NPAs lies within the banking system, expecting others other than the borrowers particularly the bad borrowers to bear the cost of NPAs is neither desirable nor justifiable. Time has come to make borrowers understand their responsibilities to banks that collect public money and lend to the borrowers.

Dr.T.V.Gopalakrishnan

( This article appeared In The Business Line Dt 7/06/10)