NPAs: Ways to deal with them

IN PERSPECTIVE

The non-performing assets (NPA) of the banks are mainly attributable to bad loans of banks. Most of these are white-collar crimes committed by the rich and the mighty. Most of the home-grown financial institutions lend money to borrowers without doing the proper due diligence of the borrowers.

The gross NPAs of PSU banks have declined by about Rs 89,189 crore as proclaimed by the government (in Rajya Sabha on July 25, 2019). The NPAs are down from Rs 8.95 lakh crore (March 2018) to Rs 8.06 lakh crores (March 2019) but this menace will continue to haunt the country.

Out of these NPAs, about a sum of Rs 58,000 crore is restructured loans and some Rs 38,000 crore is waiting to be restructured. When you analyse these figures, most of cases are of white-collar criminals.

There are mainly two reasons for an asset of the financial institution to turn bad: either the business turns up a loss-making venture, or assets are siphoned off to other businesses with an intent to defraud financial institutions.

These institutions come under undue pressure of the politicians and the mighty, and succumb to them, throwing all indicators of red flags of due diligence (if done). If not (as in most cases), it is a win-win situation for the lender and borrower.

When you analyse the problem, it clearly points fingers at most PSU financial institutions which account for more than 90% of NPAs. The recent fraud of Rs 7,200 crore is an indicator in this direction.

When one ponders over why this problem is persisting, it is hard to find a clear picture as most people concerned are hand in glove with the perpetrators, for this problem to proliferate. Most PSU staff look for lucrative postings, bonuses, pay raise etc, which are all connected directly or indirectly to being his master’s voice.

They are in their respective postings for years and they mainly focus on their tenure with the financial institutions rather than the overall health of the financial institutions itself.

Most of the PSU banks do not have the in-house capability to carry out proper due diligence of the borrower. This, in order to identify the possible red flags including conflict of interest.

This is a poor reflection of the popular slogan ’Penny wise and Pound foolish’. Their due diligence is mostly restricted to asking similar businesses in the marketplace who are also borrowers of the financial institutions (about the borrower). This practice is neither complete nor foolproof.

Hence, in the due course of time, the financial institutions have a huge exposure. Most borrowers pay their dues correctly in the first few months or years. Then they slowly indulge in siphoning off the borrowed capital to other ventures under different names (which may exist on paper only). This activity is most common in family-owned businesses. It is the common man who suffers at the end.

No panacea

Mere restructuring of loans is not the panacea to the core problem. But this measure is resorted to by the PSU banks as it does not draw undue attention and yet help the white-collar criminals. It must be a combined approach of carrot and stick to resolve this issue.

The preventive measures could be: proper due diligence of these clients by the PSU banks (the cost of which can be apportioned to the client). Diligent scrutiny during sanctioning of these loans can help reduce these NPAs further.

We also need to carry out proper vetting of the bankers to avoid conflict of interest with the clients while sanctioning the loans. Institution of `maker-checker’ concept in sanctioning these loans will go a long way in preventing them from becoming bad debts.

Post facto NPAs can also be dealt with by the following measures: a) The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (Sarfaesi) enables the banks to deal with the NPAs without the court intervention by resorting to (1) Asset Reconstruction, (2) Enforcement of Security, and (3) Securitisation; (b) Invoking Insolvency and Bankruptcy Code: banks to either reviving or liquidating the companies, and (c) Use of Debt Recovery Tribunals and Lok Adalats.

The last one is seldom resorted to proactively by the PSU banks unless they are forced to by the Ministry of Finance and RBI.

Strict adherence to these measures should be exercised by the banks, regulators and the government in tandem, as there is no other alternative to improve the economy and bring to book the white collar-criminals who take advantage of the loopholes in the system.

It is the common people who suffer from these problems created by the NPAs which are man-made
The government needs to deal with this problem and take head the few mighty and rich who are taking the system for a ride.

(The writer is Executive Director and Head of Forensic Investigations Practice, Netrika Consulting India Pvt Ltd)