The Hindu Business Line : NPAs: Why the undue anxiety?

IF NOT for the accelerated provisions made to bring down the non-performing assets (NPAs) below the 3 per cent mark to comply with the last minute diktat of the Reserve Bank of India for declaring dividends, the profits of many banks would have been better for 2003-04.

The amount of dividend announced is usually susceptible to subtle suggestions and pressures from the major stakeholders. The RBI acted to check the dividend largesse. The ability to provide adequately for the NPAs is a healthy sign. And not all the NPAs are going to be a total loss, warranting write-off. A good portion of the provisions can be expected to be written-back on recovery.

There appears to be undue anxiety for reducing the NPAs. The stipulation from the RBI has only heightened this. The RBI appears to think that making an additional provision is one way of retaining the profits and improving the balance-sheets of the banks. Making provisions for all doubtful assets, rather than inflating profits, is an internationally accepted practice which not only helps the health of the banks but also improves transparency.

The net NPAs also will come down. But was it necessary to compel the banks to accelerate the provisioning without examining the implications in depth? Genuine profits can cleanse the balance-sheet, otherwise it will amount to sweeping the NPAs under the carpet.

More provisions can come only from better earnings and profits. In the last couple of years, much of the profits came from treasury operations, ranging from about 20 per cent to 70 per cent. These profits are nothing but encashment of such future benefits as higher streams of income on securities over longer periods.

It is argued that the banks are only making hay while the "interest rate" sun is shining, and will otherwise miss the profit bus. Nothing can be further from truth than this.

The built-in appreciation can be realised any time. The urgency in reducing the NPAs prompted the banks to book more profits under this head. For a discerning analyst it makes little difference whether the appreciation is retained in the bank's books or transferred to the balance-sheet as a profit.

The investment fluctuation reserve (IFR), which is also created out of profits, is meant to take care of any interest rate storm that is round the corner. The exercise of selling securities for announcing better results is like exploitation of groundwater and fossil reserves unmindful of the future.

There is a practice of making a provision and resorting to a technical write-off in the books which does not necessarily mean the end of the story. Banks continue efforts for recovery through legal and coercive measures. But the practice can have an unintended side effect of diluting the recovery process or conduct of the advance unless a strong monitoring mechanism is in place.

Classifying an advance as an NPA calls for great circumspection. The psychological impact on the borrowers as well as the bank staff is significant. The perceptions and approaches change the moment an asset becomes an NPA. The borrower becomes an undesirable customer. Banks have no time to analyse the circumstances under which an account has turned an NPA and choose easy options such as write-off or recovery.

Even if the circumstances justify, they shy away from giving time for regularising the account or undertaking rehabilitation.

Even the attitude of the borrower hardens. Banking operations are shifted to another bank making it difficult to keep track or initiate any effective measure for recovery.

In practice, the banks find the 90-day period inadequate to complete a proper assessment and even before an assessment is made the unit is dubbed an NPA, making it that much more difficult for a decision to reschedule or rehabilitate. It is like declaring a patient dead even before the investigations are carried out.

When the SSIs have to wait for three-four months to receive their payments from the larger units or the farmers have to wait indefinitely for receiving cane dues from organised buyers such as sugar factories, how does the 90-day norm fit into their working with the banks?

During this critical period, if any concession or facility is considered by the banks, or rescheduling or rehabilitation implemented, the auditors look with suspicion and dub the exercise as greening.

Statutory auditors can also play a significant role in changing the climate. But they tend to play safe rather than exercise their professional discretion and take a balanced view. It is not that the laws of the land are not defined well, but judges do differ.

Statutory audit provides for comprehensive scrutiny of banks' books, systems and procedures, processes and even policies, which are dealt with in their long form report (LFAR). However, the NPAs and the provisions occupy the centrestage.

There are borrowers who take advantage of the anxiety of the banks in pruning the NPAs. Some unscrupulous and well-to-do borrowers see an opportunity and lure the banks with offers of OTS or a compromise, walking away with good bargains. It is the responsibility of the banks to recover as much and as early as possible.

Otherwise, the financial system cannot survive. Where the loans are secured by tangible assets, it is the banks which call the shots. The SARFAESI Act also is of little help where there are no securities.

The merits of each case and not the security available should be the criteria for deciding the sacrifice. The internal systems should take care of aberrations and lay down rational criteria.

The increase in NPAs and the consequences had their share in denial of credit or delays.

Those who normally operate at zero risk level find it convenient to take shelter under the "fear psychosis". The current credit expansion seen is largely confined to retail banking and infrastructure sector. Most products in retail banking are well defined, better structured, and the appraisal methods standardised. Also not many NPAs have surfaced in these segments yet, encouraging the bankers to take a little more risk.

Once an account is classified as an NPA, provisioning follows. The next prompted step would be to write-off. Where provision exists and there is no impact on the current year's profit, the recovery efforts get diluted and the temptation is to keep the NPA out of the books (and out of mind). This is also a dangerous fallout of the NPA syndrome.

The need of the hour is to review the entire gamut of asset classification and provisioning norms afresh, before imposing further discipline merely to fall in line with global standards. After all, the entire system has to move in tandem and not banks alone if the reforms have to succeed. Attention to the NPAs should be moderated with ground realities and not become an obsession.

(The author is former Managing Director, State Bank of Mysore. He can be contacted at sitaramamurthy@yahoo.co.uk)

More Stories on : Non-Performing Assets | Insight

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
What price NRI deposits?

NDA's boycott `tamasha'

Concessions come with a price

May ambiguity cease in cess accounting

Problems a tonne in tonnage tax

Cartoon

NPAs: Why the undue anxiety?

FTA: Economic interaction will grow substantially — Mr Satish Sehgal, Director, Board of Trade, Thailand

Privatisation is at sea, let's push it to the ocean