Indian banking system has been under severe stress due to mounting non-performing assests (NPA). It is time some radical steps are taken to surmount it
A robust banking system is the backbone of any
economy but the gross Non-Performing Assets (NPA) of our banking sector is expected to surpass 10 per cent and probably it is likely to become highest in the world. This situation has already deteriorated the financial health of our banking system and put the banks under severe stress. There is a lack of demand in the market and the loan disbursal has seen downward trend which has impacted the overall investment cycle of the economy.
President Pranab Mukherjee has approved an ordinance giving wider powers to the Reserve Bank of India (RBI) to tackle the increasing number of bad loans.
The Cabinet had earlier approved the ordinance to amend the Banking Regulation Act to make it easier to deal with non-performing assets (NPAs).
In February, three state-run lenders, Central Bank of India, Dena Bank and Allahabad Bank, reported massive losses.
Mr Arvind Subramanian released the economic survey before presentation of the budget and he also emphasised the need to check the NPA mess. However this twin balance sheet issue has not cropped within last few months. The NPA mess is a result of signs which were overlooked constantly. The Reserve Bank of India (RBI) had issued a master circular in June 2015 on wilful defaulters in which amongst other recommendations, financial institutions were advised to initiate action against erring professionals and file criminal cases against wilful defaulters. Guidelines issued by the RBI were quite comprehensive but they lacked monitoring by the Central Bank. An RTI reply received from the RBI admits that Central Bank has no information about the status of implementation of these guidelines. Merely issuing the guidelines without any monitoring hardly serves any purpose.
At a time when economists and the RBI Governor are raising concerns over farm loan waiver, their silence coupled with inaction on corporate borrowings, gives an impression that our institutions are promoting crony capitalism. It is the dichotomy of our esteemed institutions that they run behind small and marginal farmers who hardly owe even one-tenth of the bad loans but they remain silent over matters relating to corporates where large amounts are involved.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the Sarfaesi Act) is an Indian law. It allows banks and other financial institution to auction residential or commercial properties to recover loans
Under this act if borrower of financial assistance makes any default in repayment of loan or any
installment and his account is classified as Non
performing Asset by secured creditor, then secured creditor may require before expiry of period of
limitation by written notice to the borrower for
repayment of due in full within 60 days by clearly
stating amount due and intention for enforcement. Where he does not dischage dues in full within 60 days, THEN WITHOUT INTERVENTION OF ANY COURT OR
TRIBUNAL Secured creditor may take possession (including sale, lease,assignment) of secured asset, or takeover management of business of borrower or appoint manager for secured asset or without taking any of these action may also proceed against guarantor or sell the pledged asset, if any.
The Government has taken a series of legislative reforms to deal with the acute problem but results are not yet visible. It is important to take action against the culprits and send a message that government is serious about white collar crimes otherwise just making the laws will not make any
difference. Some of the possible ways to deal with this scenario can be-
1. Dealing with Asset Reconstruction Company (ARCs) : SARFESI Act, 2002 has been amended to empower RBI for regulating the ARCs. However the banks are hesitant over transferring the bad loan to these agencies. Though the banks have already covered their exposure by creating a provision against the doubtful advances but they are reluctant in transferring the asset because they will have to take a haircut depending on the nature of collateral and other factors. It’s natural for any government official to be cautious while dealing with this issue because he may be held liable for impropriety because valuation of the receivable is a subjective term. The Government has cleared an ordinance to tackle this issue but valuation norms should also be clarified so that it can be a win-win situation for both banks as well as ARCs. There should be monetary threshold over which the proposal of transferring the receivable to ARC will be vetted by apex bank or any committee. A collective decision making will not only bring the collective wisdom but will also safeguard the interest of government employees.
2. Recovery of excess amount over valuation determined at the time of transfer: As mentioned above, valuation of asset is a subjective aspect and therefore it should be clearly articulated in the asset transfer agreement that in case amount realised by ARC exceeds the amount estimated at the time of transfer then certain part of excess realisation will be passed on to bankers. This kind of clause in the agreement will ensure that each party is getting its fair share.
3. Quality of collateral for all future loans: Large
borrowings are always secured against collaterals and a charge is created in favour of banks on all the collateral assets. Banks always keep a buffer against the market value of
collateral security to safeguard their interest but it is quite surprising that banks hardly realise their amount even after liquidating the borrower’s assets. In some cases even the title of the asset pledged with the bank is under dispute. It is
clearly evident that there are lapses in the due-diligence process which is carried out by banks for sanctioning the loans and they must put their house in order. Banks have to rely on reports issued by professionals and they should also be made accountable in case they have indulged in wrongdoings.
4. Monitoring of use of loan: It is no secret that list of wilful defaulters is quite long and various influential personalities also figure in this list. Usually borrowers siphon off the money and ultimately banks suffer in this entire process. Though currently there is a process to check the end use of loan but how diligently it is followed is always questionable.
SARFESI Act was amended some time back and Insolvency and Bankruptcy Code, 2016 was also notified last year. The Ordinance to amend the Banking Regulation Act, 1949 for empowering the RBI to issue directives on the matter relating to bad loan will also become just another law unless it is implemented in the right spirit. Public money which could have been used for some productive purpose is channelised to recapitalise the banks and borrowers are enjoying at our cost.
(The writer is a Chartered Accountant and Anti Money-Laundering Specialist)