Operation Clean-up

Finally, there seems to be some light at the end of the tunnel for banks weighed down by their large portfolios of non-performing assets (NPAs). Part of this has come about because of the economy bottoming out, leading to a reduction in fresh loan delinquencies. Public sector banks (PSBs) actually saw their total NPAs decline in the January-March quarter, after expanding sequentially by 6-10 per cent in the previous three quarters. Besides, they have started selling some of their bad loans to Asset Reconstruction Companies (ARCs). Such asset sales amounted to around ₹50,000 crore in 2013-14, against ₹12,000 crore in the preceding fiscal.

The ARCs were set up over a decade ago to help banks expedite loan recovery without the intervention of courts. But until last year, this route was hardly used as banks were reluctant to sell their NPA portfolios at the steep discounts demanded by the ARCs. But now the sheer weight of NPA pile-ups has forced banks to negotiate mutually acceptable solutions for selling their bad loans at higher prices in return for deferred payments. While this is welcome, PSBs have also turned more willing to explore other avenues to shed bad loans. This has happened especially since the Reserve Bank of India’s (RBI) diktat on early recognition of doubtful loans — even before the existing 90-day overdue norm for explicit NPA classification — coming into effect this April. The RBI has, moreover, granted banks some accounting leeway to recognise losses from asset sales to ARCs over a two-year period. This has been a big relief to most PSBs, who are yet to provide for half of the bad loans in their books.

But it may still be some time before PSB balance sheets are repaired substantially to enable them to resume large-scale lending, especially to long-gestation infrastructure projects that the current government sees as the key to drive the next investment and growth recovery. For this to happen, judicial interventions that cause delays in the ARC process need to be reduced. This will help both banks as well as the ARCs to quickly unlock value from the borrowers’ assets. Also, before they embark on their next lending cycle, banks need to address the many lacunae in their existing practices. The NPAs that have mounted during this downturn have brought to light PSBs’ flawed approach to consortium lending as well as lack of prudence in increasing exposures to select sectors and business groups. It has also cast doubts over their ability to conduct due diligence on long-term projects and assess the risks that could lead to delinquencies. In this context, reducing direct government control over PSBs, in line with the recommendations of the PJ Nayak committee and bringing in private sector or foreign partners with requisite expertise would improve both their project assessment and risk management systems. This will ensure the next boom will not result in an NPA build-up of the sort we saw at the end of the last one.

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