Economic wealth is perhaps being frittered away without any attempt to find out whether it can be reactivated to generate returns.

B. Radhakrishnan

The concept of non-performing assets (NPAs) has become the scourge of quite a few banks, which are trying out various methods to deal with the problem. But what are the factors that have made assets non-performing?

Was the

financing done on time in keeping with the performance projections assumed and accepted for the purpose of funding? If not, non-accrual of income at the expected time creates a certain cost not earlier envisaged in the funding pattern. This often has a snowball effect.

Was the

financing done to the required level, or was part-funding released in tune with the available sanctioning powers of the authority concerned? It would then be futile to expect `X' level of performance, which would pre-suppose `Y' level of funding, when only a percentage of `Y' was made available.

Was the

funding given as per requirements of the venture? For example, under-financing of capital expenditure could result in working-capital being diverted for capital expenditure financial indiscipline, no doubt, but where should the blame lie?

The accountability factor

The methodologies adopted for tackling NPAs often find expression in knee-jerk reactions at the first sign of difficulties in a borrower's account or weakness of a unit. The action invariably taken is issue of notice and pressuring the borrower for immediate regularisation of the account or, on occasions, total liquidation of the dues to the bank concerned.

These approaches are simplistic, aimed

inter alia

at avoiding the Damocles sword hanging over the heads of the executives in the form of accountability. This is either due to:

an innate

fear at the level of the executives concerned, notwithstanding the long-term and large-scale implications and the availability of other options; and/or

the absence

of a clear message from the top management that accountability would be an issue only in cases of lack of integrity or gross and wilful negligence . This creates the base for the anxieties on the staff accountability front.

In the process, the very concept of rehabilitation and revival or turnaround of the unit has been buried without even the slightest attempt to examine whether the unit concerned has the potential to turnaround with a certain degree of hand-holding.

But, why, and under what circumstances, is this hand-holding so important? What could be the implications of not focussing on the possibility of revival of units? And what could be the fallout of ignoring this important concept? The problems being faced by a borrowing unit may be short-term in nature, extraneous and neither created nor capable of being controlled by the borrower. They have arisen notwithstanding the sincerity of intentions of the entrepreneur.

A serious implication is that the economic wealth already created is being frittered away without even an attempt being made to find out whether, with a bit of hand-holding, such assets could be reactivated to once again generate returns. (For obvious reasons, this remark would not apply where a change of management is considered a necessity, and is being put through.) The hand-holding could take the form of some concessions or additional financial support or, at times, just a bit of forbearance. The irony is that banks continue to deploy funds to create assets through company B when the assets idling away with company A, in the same line of activity, can be reactivated with a certain pragmatic approach and at a cost which would be a fraction of creating fresh assets.

Rehabilitation package

The process of formulating a rehabilitation package does require positive role-play by various connected agencies. Answers to the following questions would perhaps put the concept of rehabilitation/revival in the right perspective:

Before extreme

steps are initiated for recovery of dues, has a viability exercise been carried out to assess the potential of the unit in difficulty to turn around?

Is there

any certification or confirmation in a bank that the exercise mentioned in the previous point has been carried out in respect of each of the accounts put under recovery proceedings, and the non-viability established?

Such a certification is as important as that relating to whether the listing out of the NPAs has been properly done to include all such accounts, and needs to be examined at all levels and by all connected agencies, whether inside the bank, auditors (statutory/concurrent/internal), regulators, with as much keenness as the classification of NPAs.

A word of caution

The concept of rehabilitation is often confused with relief being extended on ad hoc basis without any scientific assessment of viability. Such exercises not only do not help in the turnaround of units but also attempt to keep such accounts outside the purview of NPA classification without proper justification (commonly called `ever-greening'). This has the direct effect of not making the right level of provisions and, consequently, showing the profits at a level higher than is the case. The implications are obvious and hardly require elucidation.

It is common knowledge that provisions get released while removing an NPA from the bank's books. These go to improve the credit side of the Profit and Loss account. In the process of assessing the operational efficiency, would it be more realistic, scientific and, perhaps, justifiably conservative to segregate and view independently such credits, at least in those cases where recovery steps had been taken without establishing the non-viability?

This issue can be debated upon, and though there may be resistance to accepting the suggestion or difficulties in identifying the quantum being thus released, the effort may be worthwhile if, without compromising the spirit and process of one-time settlements and other well-intended recovery measures, it could bring into sharper focus the process of re-activating the dormant economic wealth that is steadily being eroded. Any takers?

(This author, a former banker, can be contacted at

(This article was published in the Business Line print edition dated November 28, 2006)
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