Opinion

Tackling NPAs calls for a shift in strategy

Nishikant Dubey | Updated on September 20, 2019 Published on September 20, 2019

Bad loans Due diligence is a must   -  istock.com/KittisakJirasittichai

Before considerations of provisioning, problem loans need to be identified by using transparent, meaningful criteria

Compared with the present, a larger number of bad loans were originated in the 2006-08 period of the UPA era, when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget. It is at such times that banks make mistakes. They extrapolate past growth and performance to the future. So they are willing to accept higher leverage in projects and less promoter equity.

Indeed, sometimes banks signed up to lend based on project reports by the promoter’s investment bank, without doing their own due diligence. Promoters were pursued then by banks waving cheque books, asking them to name the amount he wanted. This is the historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle.

Assuming corruption

Undoubtedly, there was big corruption in the political system of UPA, but it is hard to tell banker exuberance, incompetence, and corruption apart. Clearly, bankers were overconfident and probably did too little due diligence for some of these loans. Many did no independent analysis and placed excessive reliance on bodies such as SBI Caps and IDBI to do the necessary due diligence.

Unscrupulous promoters who inflated the cost of capital equipment through over-invoicing were rarely checked. Public sector bankers continued financing promoters even while private sector banks were getting out, suggesting their monitoring of promoter and project health was inadequate.

Too many bankers put yet more money for additional “balancing” equipment, even though the initial project was heavily underwater, and the promoter’s intent suspect. Finally, too many loans were made to well-connected promoters, who had a history of defaulting on their loans. Unless we can determine the unaccounted wealth of bankers, I hesitate to say that there was a significant element of corruption. Rather than attempting to hold bankers responsible for specific loans, I think bank boards and investigative agencies must look for a pattern of bad loans that bank CEOs were responsible for — some banks went from healthy to critically undercapitalised under the term of a single CEO. Then, they must look for unaccounted assets with that CEO. Only then should there be a presumption that there was corruption.

The government should focus on sources of the next crisis, not just the last one. In particular, the government should refrain from setting ambitious credit targets or waiving loans, for which here are the arguments:

Credit targets are sometimes achieved by abandoning appropriate due diligence, creating the environment for future NPAs. Both MUDRA loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk. The Credit Guarantee Scheme for MSME (CGTMSE) run by SIDBI is a growing contingent liability and needs to be examined with urgency.

Loan waivers, as the RBI has repeatedly argued, vitiate the credit culture, and stress the budgets of the waiving State or Central government. They are poorly targeted, and eventually reduce the flow of credit. Agriculture needs serious attention, but not through loan waivers. An all-party agreement to this effect would be in the nation’s interest.

The NBFC crisis poses a fresh NPA scare even as more and more crippled banks come out of the bad asset tunnel, thus deepening growth slowdown.

Ultimately, it is poor lending rather than accounting or reporting that causes financial crisis. But the early recognition of expected losses in good times is generally agreed by policymakers to contribute to greater bank resilience mitigates the impact of crises on banks’ balance sheets and lowers the probability of downturns, resulting in debt crises that last several years.

Improving communication

But even before considerations of provisioning, problem loans need to be identified according to criteria that are transparent, understandable and economically meaningful, and there is currently no consensus on what these criteria should be.

The government should adopt a three-pronged strategy. First, there seems to be a communication gap between stressed promoters and the government, which can be bridged by setting up a sector-specific taskforce.

Second, the taskforce should suggest ways to tackle sector-specific issues.

And third, the there need to be clarity on the fact that Insolvency & Bankruptcy Code is not the long-term solution to tackle NPAs; there should be some alternative to it in place.

The writer is a BJP MP

Published on September 20, 2019
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