The Hindu Business Line : NPAs: Not a complete write-off

MUCH has been written about the banking sector's non-performing assets. A fair estimate from the banking sector reveals that around Rs 75,000 crore — or the equivalent of around $16 billion — of debt could be bad and doubtful.

This figure may appear quite astounding. But an analysis of the impact of this doubtful debt on the economy reveals certain interesting facts.

This is an accumulated figure of bad and doubtful debt over several years, and does not mean they are incurred every year.

India's GDP— that is, the value of goods and services produced in one year — is around $469 million. Therefore, for the last ten years, India's aggregate GDP is around $4,690 billion. The NPA amount of $16 billion represents just 0.34 per cent of the $4,690 billion, and it may be still more negligible if one takes into account the last 20-year period.

Again, the total advances of the banking sector to the commercial and agricultural sectors is around Rs 8,00,000 crore. Of this, Rs 75,000 crore, or 9.375 per cent of the total advances of around Rs 8 lakh crore, is bad and doubtful.

Assuming that the entire bad and doubtful debt were to be written off, the RBI has nothing to worry about because it has sufficient reserves as CRR from the commercial banks to prevent any monetary collapse. Also, of the total money supply of Rs 16.5 lakh crore, the NPA of Rs 75,000 crore forms just about 4.5 per cent — not high enough to cause undue alarm.

Now, analysing the NPAs vis-à-vis GDP, certain important economic analyses should not be forgotten. By incurring bad debt of just 0.34 per cent, the economy produced GDP of $4,690 billion in the last 10 years.

Thus, had the banking sector not been bold enough to extend this credit, or advances, the economy would certainly have missed this output of goods and services, all of which the as citizens enjoy. Shortage of production of goods and services would naturally lead to other disastrous consequences and social imbalances.

NPAs result from sickness in industry and agriculture which, in turn, is because the sectors cannot manufacture or produce competitively.

The management of a company or an agriculturist does not have high technology at hand to reduce costs of manufacture/cultivation compared to his competitors elsewhere in the world and, thus, is often forced to wind up, making way for more efficient competitors.

Therefore, in a capitalist economy, as there is little government protection, it is the efficient players that survive. Society benefits at large to have low-cost products or services. If this process of birth and death is not allowed, the opportunity to benefit from high technology or quality products is lost. This process of competition, which ultimately benefits the consumer, is reflected by the NPAs, so to speak, in terms of finance.

Any undue influencing of this process would cause a serious dent in technology development. By promulgating draconian laws, any government would seriously jeopardise its industrial and agriculture capability as the entrepreneurs would be shy of taking risks in production and development.

Prof Joseph Schumpeter said that "the higher the risk, the greater the return. The entrepreneur who is capable of taking risks alone gets the profit to the degree he takes such risks". And Nehru motivated businessmen by saying: "Always hitch your wagon to the star".

In a pure capitalist economy, it is an unwritten rule that efficient outfits producing/delivering low-cost, high-quality goods and services survive, and the inefficient ones close down. Efficient unit, by adopting high technology, are able to produce high quality goods and sell them at relatively low prices and retain some profits. The inefficient ones fall by the wayside because of the non-adoption of relevant technology, leading to production of high cost and unacceptable goods and services.

The point of reference is, thus, the existence of the inefficient units. When the inefficient players succumb to the natural process of elimination, bankers and financial institutions need not loose sleep because the inefficient ones would also have contributed to the economy by paying various factors of production, such as land, labour, interest, rent, and so on.

They should also remember that the present efficient firms can become inefficient tomorrow as more upgraded technology flows in. Considering NPAs alone, if they stop financing today's efficient players, or had not financed yesteryear's inefficient ones, it could have been disastrous as the economy would not have known what is meant by goods and services, and what was the plane of reference.

The entrepreneurial activity of risk-taking, without which no economy can progress, would have totally collapsed. Thinking of NPAs alone, if financiers do not provide the much-needed capital, or enact draconian laws that act as a deterrent for small and big business, the economy would naturally stagnate .

This does not mean that bankers can lend merrily. They should also understand technology to a certain extent, to assess correctly the pros and cons of a project or a venture.

Too much of harping on NPAs would be unfair, as the benefits the economy has achieved by its entrepreneurs, agriculturists, and service would have largely been ignored. Even taking into account the Rs 75,000 crore of NPAs, the economy would not have seen a total loss in real terms, as various factors of production would have been paid, at least to some extent, by the businessmen in their period of operation. When factors of production have been paid for, they only act as an income for the other sections of society.

However, while care must be taken while giving advances, this should not come in the way of aggressive lending as the economy has talented and committed people to more than make up for the loss caused by NPAs.

(The author, a businessman, is a former faculty member of the Loyola Institute of Business Administration, Chennai.)

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