NPAs: Banks alone are not to blame

The non-performing assets (NPAs) in the Indian banking system have become matter of heated discussion in the Parliament, media and the financial markets at home and abroad. The continuous one-way movement of the NPAs has been posing a threat to the stability of the country’s financial system and the economy as such.

The share of NPAs in banks’ total advances is moving close to the double-digit level while the percentage of stressed assets has already crossed 11 per cent. Realising the severity of the problem and the ineffectiveness of the Debt Recovery Tribunals (DRTs) or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, the Centre now proposes to enact a new debt recovery bill.

A big worry What was considered an issue concerning public sector banks (PSBs) alone assumed alarming proportions. It has engulfed the entire industry during the past two years, threatening the economy itself, with continued high interest rates, poor investments and low credit off take.

Industries and enterprises, big and small across the spectrum, have become sick, with exceptions such as consumer goods, pharmaceuticals and utilities such as telecom and transport.

The now prolonged downturn in the world economy, India not being an exception as is being projected, and the falling commodity prices have contributed to the growth of NPAs in a greater measure. It is, however, ignored that the long delays and gestation periods of several infrastructure projects caused distress in the banks’ assets, and the mounting NPAs.

The failure of the road, bridge, coal and power projects, accounting for a major chunk of the NPAs can’t be blamed on the world economy. The reasons are homegrown and the governments can’t absolve themselves of their responsibility.

If ab initio , the inadequate and poor risk assessment of the proposals by the banks themselves began the process, the policies and procedures pursued by governments and their bureaucracies too played a significant role. Delays in land acquisition, absence of, or uncertainty in, policies and the typical bureaucratic red tape, have added to the woes of the borrowers for infra projects.

Beyond the obvious Warring political groups create hurdles in the smooth implementation of decisions taken, spearheading opposition to the projects over their location and supporting agitations. Both, the enactment of legislation and its implementation was never smooth. Policies kept changing with changes in governments. Worse, the governments did not even assume responsibility for the about-turns that crippled many a project.

Resistance to toll collection in road and bridge projects became a political weapon forcing some States to stop collections altogether. In such cases, compensation to promoters was neither adequate nor timely. Continuous tinkering with tariffs or collection of user development charges in case of rail and airport projects left both the project promoters and the lenders in a quandary, upsetting the revenue projections.

The bureaucracy and tax authorities operate in a world of their own, oblivious to the market realities. Their interpretation of law is always aimed at meeting their targets for filling coffers of governments. Violation of law or well-settled decisions or awards of the arbitrators, tribunals and courts, is carried out routinely. Valid precedents are ignored as well.

Appeals against adverse awards and judgements are made without proper examination of the merits; nor are they based on sound legal advice. Some cases are taken right up to the Apex Court, leading to accumulation of a large number of cases and taking unduly long time for settling claims/payments. In the face of such unpredictable and uncertain delays, the debt burden only mounts. The promoters fail to service the debt or honour their commitments for repayment of the loans.

Not withstanding the well-intentioned procedures for remedying the situation, such as provision for arbitration or creation of tribunals, dues and claims of promoters remain outstanding for years. Demands from the government departments or the invocation of bank guarantees without much thought, cause immediate distress. They can give rise to liquidity crunch even for the well-established industries or projects. Strict timelines for decisions by various authorities including arbitrators or tribunals should be in place.

And once a decision emerges once again either to contest or settle any claims should be time bound, failing which bank rate of interest should be paid. Action should also be taken against the erring executives.

The other factors Cases where a project suffers due to changes in the governments’ policies, those come under the force majeure clause of a contract, are ignored. An example will suffice to describe the ordeals.

A State government abruptly banned stone quarrying in their State, upsetting the cost benefit calculations and time schedules made in the case of the road projects in progress.

The contractors had also to make alternate arrangements to procure metal from other States, causing longer lead times and increased costs. The government chose to blame the contractors for delays in execution and began imposing penalties or with holding payments. They ignored the genuine reasons for the impasse.

The claims of contractors were either rejected or kept in abeyance, despite decisions in favour of the contractors by the administrators, arbitrators or tribunals. Obviously, the interest burden makes many projects unviable. Also, the failure to pay dues in time, due to the delays in receipt of payments, results in their accounts becoming NPAs.

But, who carries the burden? The major chunk of the NPAs being from the PSBs, the Centre, as the major stakeholder, is compelled to recapitalise the banks in addition to suffering loss of income by way of taxes from the projects as well as the banks.

And, ultimately, taxpayers have to bear the burden of additional taxes and cesses.

It is hoped that the policy and legislative initiatives taken by the present government will, to some extent, mitigate the problems. But much depends on the spirit with which bankers, the promoters and the bureaucracy respond to the concerns and bring about the necessary changes in the environment.

The writer is a former managing director of State Bank of Mysore

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