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In official circles, there is a certain amount of gloating bordering on smugness over the reduction in NPA levels. At the end of September 2019, the GNPA was at 9.1 per cent of banks’ loans and other outstandings.
Credit for this has been given to the Insolvency and Bankruptcy Code (IBC). While it has indeed put the fear of God into defaulting company promoters (who don’t want to lose the controlling interest in the company to the highest bidder), for banks it means huge sacrifices, euphemistically and flippantly described as ‘haircuts’, in the range of 50-60 per cent.
‘Cleaning up’ the balance sheet is another flippant expression. Balance sheets of banks look squeaky clean when bad debts (or NPAs) are brushed under the carpet after the IBC resolution process is over. But then, banishing the problem is not the same as finding a solution. The IBC resolution process, to be sure, is better than the earlier state of affairs when banks would wait helplessly for years wringing their hands in desperation. In the end, they may recover a small portion, which is better than nothing. Nevertheless, banks cannot continue throwing away money. While the grim prospect of losing control of the company is bound to halt the rampaging promoters in their tracks, the economic downturn and genuine business issues often come in the way of loan and interest repayment. Some fly-by-night, thick-skinned operators do not really lose sleep over losing control of their companies.
Prime Minister Narendra Modi picturesquely described the phenomenon of behest lending as ‘phone-banking’. The RBI must mandate outsourcing of loan application appraisal to accredited credit rating agencies. If they can be counted upon to keep tabs on the financial health of the issuers of bonds, they can also be entrusted with examining the financials of the loan applicants for a fee. Should they do poorly in this task, and the loan turns bad, a portion of the fee must be made refundable. If, for example, a loan is classified as NPA in the first two years, 90 per cent of the fees must be refundable; if it happens in the third year, 80 per cent should be refunded, and so on.
Banks have also been guilty of courting trouble by lending to long-gestation infrastructure projects. Asset-liability mismatch (ALM) is a banker’s nightmare. If a bank has accepted fixed deposits of ₹1,000 crore for three years, it must earmark this for loans of shorter maturities. Otherwise it may find itself in a fix, with depositors demanding their money back after three years. It is to avoid ALM that take-out financing emerged on the scene. Like a relay race, with bank A passes the baton to bank B after the first three years, bank B to bank C after the next three years and so on, so that no bank faces the pitfalls of an ALM. But in India, take-out financing is extremely inadequate, with specialised infrastructure financing agencies like IIFCL passing the buck to the banks instead of undertaking loan appraisal upfront, and then bringing the banks into picture when things have stabilised.
In short, let’s not gloat over the fall in NPA levels. Banks which read the riot act to mortgagers and gold-loan clients have, alas, no immediate and sure-shot recourse when it comes to industrial loans. They do compensate for this extra risk by charging higher interests, but when the loans go sour, interest too stops flowing in. The government and the RBI must celebrate only when they succeed in preventing NPAs from building up in the first place, rather than after brushing them under a carpet.
The writer is a Chennai-based chartered accountant