NPA conundrum

Despite a spate of recent efforts, the non-performing assets in the banking system do not seem to be bottoming out in a hurry. Even under normal or ‘baseline’ circumstances, the gross NPAs are expected to increase from 11.6 per cent of gross advances in 2017-18 to 12.2 per cent this year. The NPAs of 11 public sector banks under ‘prompt corrective action’ are slated to worsen from 21 per cent to 22.3 per cent. The latest Financial Stability Report refers to risks arising out of commodity price increases, protectionism, rising interest rates, led by the US, and ruptures in global liquidity as potential macro complications in this scenario. If the spate of large loan defaults is anything to go by, generous provisioning and stringent disclosure norms by way of ‘special mention accounts’ seem justified. The share of large borrowers (those with an exposure over ₹5 crore) in gross NPAs is quite the same since March 2016, at over 85 per cent. How soon the public sector banks come out of the red would in fact seem to depend more on the bankruptcy code resolving some of these big cases than any sudden spurt in lending; in that event, the provisions would translate into profits. The FSR observes that power and telecom remain areas of stress, with garments and food processing doing better. In an interaction with Businessline , Steel Minister Birender Singh observed that the NPA situation had improved remarkably with respect to the sector, following the resolution of Bhushan Steel and Electrosteel debt with smaller ‘haircuts’ than anticipated. This is likely to revive lending to steel units all over again.

However, it is in small units that the provisioning could be excessive, with lending being hit as a whole in a climate of apprehension and policing. The RBI and the Centre need to address governance issues rather than indiscriminately wield the bludgeon, as it were. If some private banks have shown much lower NPAs (in the region of 4 per cent), one of the reasons is that their bankers have been trained as specialists, unlike their PSB counterparts who have worked across often disparate verticals. The boards of banks should comprise directors who can be made to account for their decisions. The sector needs robust institutional solutions rather than knee-jerk responses.

The RBI’s approach of linking recapitalisation to taking corrective steps is unexceptionable. But managerial problems need to be addressed as well. NPAs are a product of leaky and corrupt banking systems; they cannot be resolved merely be naming and shaming some individuals.

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