Time to contain formation of NPAs in Banks

Dr.T.V.Gopalakrishnan

The need to prevent formation of Non Performing Assets in banks in the interests of all stakeholders of banks who include depositors, good borrowers and shareholders is the need of the hour and is long over due. The responsibility for recognition, resolution and recovery of bad assets is basically with the bankers and the borrowers and they cannot be casual and careless in their dealings.The banks can educate and discipline the borrowers on an ongoing basis and the borrowers can be rewarded or punished if they deviate from bank's disciplinary requirements  and attempt to hoodwink the banks with their erratic behaviour and conduct of accounts leading to  formation of non performing loans.. The erring borrowers can be identified easily by banks and they can be brought under proper discipline by making them to pay a penalty based on their irregular conduct of accounts and deviation from the discipline envisaged. These penalties over a period would be adequate to cover up the losses on account of bad assets. The provisions now made towards bad assets can be minimised and the money saved on provisions can be passed on to the depositors and other stake holders. The write off of loans presently resorted to by banks at the cost of tax payers' and the depositors' money  can also be considerably brought down.The basic approach of the bankers is to discipline themselves in the selection of borrowers, grant of loans, coverage of securities, monitoring and supervision of loans,etc and enforce discipline on borrowers in a constructive manner. Borrowers are partners in business and their healthy growth should reflect in banks balance sheets. Likewise, their deterioration in health should not affect banks balance sheets and other stakeholders. Unless and until a built in mechanism is in place, there cannot be an effective control on the defaulting borrowers.Earlier the action,the better for banks, borrowers, and other stakeholders of banks and the economy. RBI being a regulator of banks and being the monetary authority of the economy cannot and should not tolerate unhealthy balance sheets of banks, large corporates and the economy. Bad assets do not contribute to the economy is a fact which cannot be allowed to continue for ever.It affects the economy badly and all its stakeholders.SEBI has also a major responsibility to ensure that by any reckoning defaulting companies should not get listed in the Stock Exchanges and they should never be allowed to raise capital through IPOs.The Corporates should have an excellent ratings from banks and these ratings should reflect on the conduct of loan accounts.These ratings should be made transparent by banks and should be available for all having dealings with the Corporates.Will the RBI and the Government show the guts to discipline both banks and  borrowers to ensure that the loans turn  productive in the larger interests of the economy, the financial system, and all its stakeholders. 

(This comment is in response to the news report that' Defaulters may have to pay higher rates, warns RBI
Governor ' that appeared in Business Standard dated12/12/13)