Prevention of NPAs in Banks is an inevitable Social Justice.

 

NPAs in Banks — At Whose Cost? The Economy and Its Stakeholders

The banking sector in general—and public sector banks (PSBs) in particular—has long operated in a manner that drains depositors’ and taxpayers’ money, aided by a nexus of politicians, bureaucrats, bankers, and errant borrowers under a relaxed regulatory environment. Former Prime Minister Atal Bihari Vajpayee candidly stated in the 1990s that “NPAs are nothing but loot.” The system has known this truth for decades, yet the problem persists despite getting some enhanced legal support as of now again at a high cost in terms of time and money - just because depositors and taxpayers silently bear the burden. Periodic bailouts follow whenever the crisis threatens financial stability.

Depositors have few safe avenues for savings beyond banks, and alternatives like gold, real estate, or other commodities often serve as conduits for unaccounted money and speculative activity rather than productive investment.

A lasting solution to the NPA problem requires discipline—both among bank managements and their borrowers—and an independent, efficient regulator free from political or bureaucratic interference. Such a model was proposed as early as 2004 in Management of NPAs in PSBs by Dr. T.V. Gopalakrishnan, published by the Indian Institute of Banking and Finance, with a foreword by Dr. C. Rangarajan, former RBI Governor and Chairman of the Prime Minister’s Economic Advisory Council. The book proposed the creation of a Precautionary Margin Reserve Fund (PMRF)—a shared responsibility mechanism between lenders and borrowers—to contain NPAs, incentivise good borrowers, and penalise poor credit behaviour.

Despite professional acclaim and recommendations for pilot implementation, the model was never adopted. Had it been, the banking system would likely have been far stronger today—reducing NPAs, preserving depositor confidence, and preventing the “twin balance sheet” problem that has repeatedly strained India’s financial stability. The recurring and accrual loss to the economy because of the NPAs is something of a very high magnitude which cannot be easily set aside to ensure and realise the the status of fast growing economy.

Dr. Rangarajan observed in his foreword (2 July 2004):

“High levels of NPAs affect profitability, liquidity and solvency of banks, ultimately impacting financial stability itself. The author has made several suggestions to contain their growth. One such idea—the Precautionary Margin Reserve Fund—envisages both borrowers and lenders contributing to a common fund. Only an efficient banking system can fulfil the socio-economic goals set for it, and this book explores precisely that.”

The RBI’s recent move to introduce minimum provisioning floors (0.25–5% for performing assets, based on risk class) is, in essence, a partial acceptance of this idea. The PMRF concept—built on mathematical objectivity and fairness—could have become an inbuilt corrective mechanism to identify good borrowers, discipline defaulters, and safeguard the interests of all stakeholders without bias or undue discretion.

Ultimately, depositors’ money—the core raw material of banking—must not be used to subsidise inefficiency or moral hazard. A system that compels prudent behaviour, transparency, and ethical accountability from both lenders and borrowers is not just sound economics—it is social justice.

Loka Samastha Sukhino Bhavanthu.

Dr T V Gopalakrishnan

(personal Views).