Borrowers are not criminals

With inflation on an upward trajectory once again, the odds are building up for policy rate hikes, even as the wheels of the economy are slowing down. On the other hand, bank balance sheets are already feeling severe stress in the wake of rising non-performing assets (NPAs) threatening to reach alarming proportions.

The Centre, being the majority shareholder of the public sector banks (PSBs), is contemplating stern action against wilful defaulters.

It is no doubt galling to see many defaulters leading luxurious lifestyles. But defaulters alone are not to blame. Indecision and policy paralysis have brought matters to such a pass.

Economic Environment

The sluggish economic environment is fuelling a further rise in NPAs.

Government spending, which should have been liberal during an election year, is not taking place with tax collections falling short of estimates. The triggers for economic revival – such as high savings and investment activity, industrial activity and job creation – are not in evidence. In this context, a further hike in policy rate is expected to put additional burden on borrowers.

Stalled Projects

By the government’s own admission, 200 projects worth Rs 7.56 lakh crore could not see the light of the day over the last few years.

The power sector is unable to do well without assured coal linkages. There are several such cases of supply chain shortcomings. As a result, gross capital formation has dipped dramatically.

With the cash flow of companies being affected, their repayment capacity has dwindled.

Economic uncertainty is making it difficult for companies to sketch the lifespan of their projects at the drawing board stage. That has pushed projects into cost overruns, at times rendering them unviable, thanks to overblown preliminary costs.

In such cases, an opportunity should be given to promoters to take a fresh look at the viability of projects. The relevant government departments should support such viable projects, with a promise from companies that they would pay back the financial sacrifices made by the government and banks, once the projects attains their original viability.

So, merely announcing single windows for various clearances may not be enough. Specifying the timeframe is important. Even rejection of certain proposals within the set timeframe is acceptable, rather than keeping hopes alive and allowing the project to rot.

Unstoppable rise in NPAs

Over the last two years, banks have been restructuring viable corporate loans in the hope that the expected economic revival would improve the situation. But that will prove to be an albatross around the banks’ neck, with the policy rates beginning an upward spiral.

Gross NPAs of PSBs rose from 2.09 per cent in March 2009 to 4.57 per cent in June 2013. In comparison, all other sectors, including scheduled co-operative banks (SCBs), are placed in a better position. Gross NPAs, along with restructured advances, account for 11.87 per cent of the total advances of PSBs by end-June 2013. There are about 12 PSBs which have more than 4 per cent gross NPAs, led by SBI with 6.34 per cent of NPAs. There are only three PSBs with less than 2.5 per cent of NPAs.

Diktats Don’t Pay

The legal system is not supportive and allows promoters to adopt various short cuts to delay debt repayment.

Debt Recovery Tribunal (DRT) officials are under pressure to become proactive towards banks only, ignoring economic realities. The Ministry of Finance appoints presiding officers of DRTs, while also controlling banks, leading to a situation of conflict of interest.

Lenders should adopt a proactive and pragmatic view on the issue of resolution of NPAs. Diktats issued by the RBI Governor or Ministry officials or even the Finance Minister may not yield results. On the contrary, adopting a consultative approach could be effective.

Recent data released by the Ministry of Finance also proves this point. Write-offs of six banks were more than recoveries in the quarter ended June 2013.

Ground Realities

As such, the ground realities (which play a bigger role in NPAs) reflect negatively on loan growth. In fact, during the quarter ended June 2013, the overall loan growth of PSBs turned negative at 0.15 per cent. So, along with banks, government may have to share part of the blame.

Given these complexities, is it right to treat promoters like criminals? They cannot be branded as criminals, except when they misuse or embezzle funds.

The recent comments of the CBI chief, calling bad loans ‘frauds’, does not augur well for the bankers, who have to take commercial decisions day in and day out.

This is the right time for the RBI or the government to announce a settlement scheme. A special one-time settlement scheme for those borrowers against whom banks have exhausted all legal remedies, and there is no further scope of recovery, could be of help.

This will work as an amnesty scheme for those whose loans have become NPAs on account of the prevailing economic environment. Boards of banks should be fully empowered to resolve such cases. These should not be allowed to be investigated later by any agency.

(The author is Chief Advisor, ‘Banking Law’, PDS & Associates, and former CMD of Corporation Bank. The views are personal.)

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