Catch NPAs before they become NPAs

The issue of non-performing assets in banks has been widely discussed recently. The governor of the Reserve Bank of India has said the matter should be approached pragmatically. The idea of instituting a government-backed ‘bad bank’ has already been mooted.

There is a talk about strengthening the hands of Asset Reconstruction Companies (ARCs). Providing more teeth to debt recovery statutes such as the Sarfaesi Act has also been suggested. It is true that all these measures are aimed at resolving NPAs. Unfortunately, all these measures are similar to discussing the type of treatment to be given to a patient who is in the ‘Seriously Ill’ list, and who is likely knocking on the doors of hell, not heaven.

There appears to have been no serious discussion in any banking fora on what could be done for the crisis-ridden loan accounts before they turn out to be NPAs.

Loans pass through three stages before ultimately slipping into the NPA category, namely SMA-0, SMA-1 and SMA-2. The classification is done on the basis of deficiency in the account and the duration for which the arrears remained overdue. For example, SMA-2 means that the arrears are overdue for a period over 60 days but below 90 days. SMA-2 accounts in the band of 75 days to 90 days can be deemed to be borderline NPAs.

As a lender it is incumbent upon every bank to thoroughly examine borrowers under the SMA-2 category and help them out if they have genuine problems, without simply letting them slip into the inglorious well called the NPA. But here is the issue. It is unfortunate that banks have their own limitations in rehabilitating a troubled enterprise according to the extant guidelines of the RBI.

In March 2016, the RBI issued a circular providing a framework for the revival and rehabilitation of MSMEs. It contained the following provisions:

The framework is applicable to MSMEs with loan limits up to ₹25 crore, including consortium lending.

Every bank shall form a committee at the district or regional level depending upon number of units lent, in order to provide the corrective action plan (CAP) to stressed SMEs.

The committee will comprise the regional head of the bank, the officer in charge of MSMEs, one independent external expert with expertise in MSME matters, and one representative from the State government (or a retired executive not below the rank of AGM of another bank).

There should be board-approved policy regarding the appointment of members of the committee and the procedure to be followed by it in discharging its functions.

Even a stressed enterprise can apply to the committee for a CAP.

The CAP could be either ‘rectification’ or ‘restructuring’.

Under rectification the bank may sanction ad hoc funding to the unit up to a maximum period of six months to help overcome the cash-flow crunch. Any rollover or repeated rectification will be tantamount to restructuring which will change the asset status of the account to substandard.

The bank can opt for restructuring after a detailed techno economic viability (TEV) study. However, the status of the loan asset will get downgraded to substandard, that is, NPA.

These directives clearly indicate the complicated process involved in nursing and reviving a stressed business enterprise. It’s hardly pragmatic.

Normally, a lender will always be keen to reclaim his money and so long as the means of recovery are lawful there need be no restrictions. But if the lender happens to be a banker the rules of recovery are rigorous. A banker cannot freely devise any scheme of recovery.

It is, therefore, essential to deliberate on this issue at the highest banking levels; the outcome must be communicated to the RBI with suitable recommendations.

In the meantime, the RBI will also do well to revisit its circular and come out with a fresh set of guidelines enabling banks to offer a revival package to deserving MSMEs without compromising their own balance sheets in the process. This will give banks much-needed encouragement in the matter of credit dispensation. With renewed buoyancy in credit growth, the green shoots of recovery in our economy will certainly appear very soon.

The writer is the director of City Union Bank. The views are personal

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