Intro: Non-Performing Assets (NPAs) are the best indicator for the health of the banking industry. They reflect the performances of the banks and are the primary indicators of credit risk. As they are the inevitable burden on the banking industry, the success of a bank depends on the methods adopted for managing NPAs.
In spite of adopting the best banking practices of the advanced nations, the Non-Performing Assets (NPA) growth of Public Sector Banks in India has reached an alarming level of 4.6 % as on 30 June 2014 as per ICRA (formerly Investment Information and Credit Rating Agency of India Limited- is now a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange) report.
If we take into account the loan restructuring and loan write off, the NPA would cross two digit figures- India Ratings and Research Private Ltd. have projected Indian banks’ stressed assets to grow to 14% of the total loan by March 2015. The NPA growth has not caught up with the private banks as they were not much involved in priority sector finance and had little to do with governments’ lending target. The rating agency, Credit Rating Information Services of India Limited (CRISIL) found sluggish demand for investment, asset quality deterioration, global slowdown and looming economic uncertainties responsible for NPA rise. The gross NPA of banking sector rose from Rs 39,030 crore in March 2008 to Rs 1, 64,461 crore in March 2013. Between 2007 and 2013, the banking sector has amassed nearly Rs 6.5 lakh crore bad loans. The outstanding bank credit to the infrastructure sector increased to Rs 7, 86,045 crore in 2012-13 from Rs 7, 243 crore in 1999-2000.
The collapse of Lehman with its $639 billion in assets in 2008 had a multiplier effect worldwide, severely weakening other big banks and sharply increasing the level of fear and distrust inside the system that caused bankers to sharply reduce their lending. Lehman’s assets had grown like balloon Vis-a- vis huge disguised liabilities and the balloon ruptured in July 2008 causing its collapse. Subsequent to the collapse of the giant US bank, the banks in developed nations improved their checks and control mechanism, introduced strict appraisal method, improved risk analysis, audit and strict loan monitoring as preventive measures.
It is not understood why did the Indian banking sector instead of taking cautious steps had opened the flood gate of loans to risky sectors. Banks were in such a big hurry that out of one rupee lent by banks between April 2013 and December 2013, around 13 paise turned into bad loan. Between April 2013 to December 2013, 42 banks had lent Rs 5.02 lakh crore only to generate excess NPA of Rs 67,394 crore. The restructured assets totaled to Rs 3.6 lakh crore as on 30 September 2013. Out of that, 30 % restructuring was done in power sector, aviation sector, construction and engineering, steel, textile and telecom infrastructure.
Shri K C Chakraborty, the former Deputy Governor of RBI has reportedly blamed bankers’ laxity in credit appraisal for the rise in bad loans. Why the Indian banking sector had slackened its credit appraisal norms between 2008 and 2012 and ended up in a pile of bad loans remain unanswered.
The decline in Capital Adequacy Ratio (CRAR) from 15 % in December 2009 to 13% in March 2014 confirms banking sector’s credit misadventure when the situation demanded for caution (The CRAR of banks reduces if banks’ take higher credit risk for quick gain from economic bubbles.) Now who will own the responsibility for the huge spurious assets worth Rs 6.5 lakh crore? Unless the Union Government zeroes in on people who are responsible for the worst business disaster in a poor country like India, the banks will always put its stake holders at risk.
The Finance Ministry has decided to review the recent appointment of top level public sector bank executives and the proposals to designate Chairmen just before the UPA government demitted office. The incident of stage managed interviews, top slots given on the basis of ACRs overlooking interview performance and changing of selection criteria for appointment at last minute by Department of Financial Services have been reported in newspapers. CBI has also found the selection criteria was overlooked to accommodate less qualified CEOs and the board members drawn from nonbanking professions.
The massive bad loan and restructured assets do not rule out bigger financial conspiracy. Diversion of low interest credit for different other purposes, frauds of huge size, flight of capital to outside countries, projects suddenly becoming non performing and the willful default of bank loans show the crux of the matter is something different from what is propagated. The Times of India has reported on 21 August 2014 how Winsome Group which claim to be a diamond trading company had defaulted Rs 6581 crore from 15 Public Sector Banks in India. The Times of India investigation raised suspicion about banks credit diverted for real estate development in Dubai and Mumbai and other businesses outside India. Interestingly those banks accepted a collateral security worth Rs 250 crore from Winsome Group against the credit size which was 26 times more than the collateral security.
Examining the authenticity of spurious companies is a big challenge for the banking sector. The threat to banks may be bigger after small banks merge to become big banks to cater to the global demand. It is estimated that the Indian banks will need Rs 5 lakh crore capitals to comply with the Basel III norms by 2018. It is true that big banks with large capital base will open up new vista of business opportunities and will have resilience to withstand any shock. But along with the opportunities there is also a looming risk-There is no guarantee that the big banks won’t fall.
Hence, there is an urgent need for a dedicated risk analysis before the mega merger. The risk may be from- fraudulent accounting, from spurious companies who hide the intention to be willful defaulters, server risk due to sophisticated hacking, concentration of investment, high risk investment, external influence which is not India specific and above all the risk from conflict of interest situation.
Though Indian banks have adopted the world’s best practices to monitor NPA and have mechanism to emit red signal about stressed assets, it needs to have the will and expertise to nip the crisis in the bud.
-Sudhansu R Das (The writer is a senior journalist )