Editorial. Banks’ NPA management needs to be more holistic

Recently, Finance Minister Nirmala Sitharaman told Parliament that Indian banks have managed to recover 13 per cent or ₹1.32 lakh crore, out of the whopping ₹10.09 lakh crore in non-performing loans written off in the five years from FY18 to FY22. This includes recoveries from all available mechanisms including debt recovery tribunals, cases resolved under the Insolvency and Bankruptcy Code (IBC), action taken under the SARFAESI Act, sale of non-performing loans to asset reconstruction companies and so on.

Typically, banks take four-five years to completely write off loans after initially classifying them as non-performing assets (NPAs). The recoveries ratio may not seem so bad when benchmarked against global numbers where the average recovery from bad loans is estimated at 7 to 12 per cent. Recoveries against written off loans in India also seem to have improved from 7 per cent levels they were stuck at for many years. But the figure is modest when seen in the context of the expanding armoury of weapons handed out to Indian banks in recent years to bring defaulters to book. From amendments to IBC that enable lenders to unseat promoters of defaulting enterprises and invoke personal guarantees, to the Fugitive Economic Offenders Act which empowers banks to summarily seize assets, India has made significant strides in tightening the ecosystem for bad loan recoveries. If not impossible, it is certainly difficult for loan defaulters in today’s context to flee the country as a Vijay Mallya or a Nirav Modi did.

If non-performing assets are expected to fall to a multi-decade low of 4 per cent in FY24 (as per CRISIL), it is mainly due to the slump in private capex, banks holding back on project lending and deleveraging by India Inc. Lending and underwriting practices still have substantial room for improvement. For instance, some banks have been increasing their exposure to holding companies based on ‘operating comfort’ provided by their subsidiaries which are already leveraged to the hilt. This practice was one of the key reasons why group-level loan exposures turned bad in the previous cycle. Cash flow-based financing, a model where it is difficult to time risk, is gaining momentum. Such practices are prevalent to a lower extent today compared to the infra-boom days. But as they embark on bankrolling the next capex cycle, the best way for banks to reduce the need for write-offs is to nip NPA accretion in the bud. This may require more pre-emptive action when loans slip into SMA (special mention account) status, rather than waiting for them to turn NPA.

RBI on its part must nudge banks to provide more granular disclosures on their loan write-offs and recoveries, on a systematic basis. The current data is sketchy at best. A sharper time-wise break-down of NPAs, write-offs and recoveries is essential to understand what proportion of bad loans are resulting from wilful defaults and promoters siphoning off funds, as opposed to economic cycles or business exigencies. Where there’s clear evidence of wilful default, a name-and-shame regime can act as a deterrent to wrong-doers, and also alert stakeholders.

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