NPAs: Setting the record straight

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NPAs: Setting the record straight

Saturday, 18 November 2023 | Uttam Gupta

NPAs: Setting the record straight

The Modi Government has made unstinted efforts to make the defaulters pay up and also ensured that no new NPAs are created

As per the information shared by the Reserve Bank of India (RBI) in reply to the RTI question, scheduled commercial banks (SCBs) had written off non-performing assets (NPAs) - an acronym for loans that have gone bad - worth over Rs 10,57,000 crore in the last five years. This amount is often cited by the opposition in particular, the grand old party (GOP) to lambast Modi – government for having given what they term as ‘loan waiver’ to big industrialists and businessmen.

Has Modi granted favours to the big-wigs?

To address this, we need to answer two fundamental questions. When does a loan become an NPA? How does the bank deal with it? A loan account becomes an NPA when interest and/or instalment of principal remain overdue for a period of more than 90 days. The borrower could land in such a predicament under three different scenarios:

First, the bank officials have conducted due diligence, carefully assessed the viability of the project or venture for which the loan is considered, convinced themselves about the credibility of the borrower and kept track of the utilization of the funds, functioning of the enterprise, its profitability, generation of cash and so on. The chances of such a loan account becoming NPA are minimal; if at all it happens it could be due to circumstances totally beyond the control of the borrower say, for instance, the impact of the Covid pandemic.

Second, the officials have granted loans in a cavalier fashion without conducting due diligence or assessing the project/venture’s viability and haven’t put in place mechanisms to track the utilisation of funds, functioning of the enterprise and so on. There is a greater chance of such a loan turning into an NPA.

Third, the bank’s top brass in utter disregard for due diligence acts with mala fide intent under what is termed a “quid pro quo” arrangement. Put simply, it approves and disburses loans in exchange for bribes. In this scenario, it is almost certain that the loan would become NPA as it was taken with the sole intention of not returning it.    

Replying to the debate on the President’s address during the opening of the budget session of the parliament in February 2018, Prime Minister, Narendra Modi stated that there had been a massive proliferation of loans given by the banks on the directions of the ruling political establishment to favoured industrialists and businessmen. During 2008-2014, loans worth Rs 3500,000 crore were given. The bulk of these loans were given in the second and third categories. Therefore, it was quite likely these would become NPA.

This is corroborated by the RBI data on the addition of new NPAs as a percentage of the opening balance of NPAs in that year between 2009-10 and 2015-16. In 2009-10, 2011-12 and 2015-16, the addition of new NPAs was higher than their opening balance. In the remaining years 2010-11, 2012-13, 2013-14 and 2014-15, the addition of new NPAs was at least 90 percent of the opening balance.

After 2015-16, this ratio has consistently fallen and it was around 1/3rd in 2020-21 and 2021-22. The impact in the case of public sector banks (PSBs) was more pronounced where the ratio was even lower at 22 per cent during 2021-22. It clearly demonstrates that under the Modi – regime, banks in particular, PSBs were more careful in giving loans (category 1) resulting in a much lower ratio.         

There is another point of differentiation between the UPA – regime (2008-2014) and Modi (2014 onward). Whereas, under the former, banks kept NPAs under the carpet by using techniques such as ‘evergreening’ of loans - fancy nomenclature for the bank giving more loans to enable the borrower to service the previous loan – thus making the loan account look normal, under the latter they were forced to ‘truthfully’ reflect NPAs in the balance sheet (BS).

Modi got it done even for the loans given under UPA by asking the RBI in 2015 to conduct an asset quality review (AQR) of all SCBs to identify NPAs. As a result, their gross NPAs scaled to a high of Rs 1036,000 crore as of March 31, 2018. 

How did the banks deal with these NPAs?

Following prudential accounting practice and as per RBI guidelines, they wrote off these loans. It is a mandatory requirement to reflect on a bank’s true financial health. It isn’t a loan waiver (the opposition/GOP want the public to believe that it is) as the bank continues to chase the defaulter including legal courses to recover it.

To enable banks to pursue their efforts on the fast track, in 2016, the government enacted the Insolvency and Bankruptcy Code (IBC) superseding subsisting laws. In 2017, it amended the Banking Regulation Act (BRA) giving RBI the power to force banks to act if they don’t do it on their own. On February 12, 2018, RBI issued a circular containing the specifics of how it was to be done.

The government has made life for willful defaulters (borrowers who can pay back yet decide not to) pretty tough. They are not sanctioned any additional facilities by banks or other FIs, and their unit is debarred from floating new ventures for five years. Additionally, they and companies that have them as promoters/directors are debarred from accessing capital markets to raise funds. Furthermore, under IBC, such promoters can’t remain in control of the entity.

As per the information given by the Ministry of Finance (MoF) in Parliament, during the last nine years, SCBs have undertaken an aggregate recovery of Rs 10,16,617 crore of NPAs. Out of this, the Central government gave around Rs 300,000 crore as budgetary support to shore up the capital of PSBs during 2016 - 2021. Furthermore, in the budget for 2021-22, it committed another Rs 200,000 crore by way of a sovereign guarantee for the security receipts (SRs) to be issued by NARCL where the majority shareholding is vested in PSBs.

After adjusting for Rs 500,000 crore being the contribution of the government, banks still recovered a substantial amount of Rs 516,617 crore from the defaulters. The recovery would have been much more but for the judicial bottlenecks in the insolvency proceedings under the IBC. As such the decisions of the National Company Law Tribunal (NCLT) – the designated authority for such matters - are subject to appeal in the National Company Law Appellate Tribunal (NCLAT), the High Court and the Supreme Court (SC) which leads to delays as big defaulters invariably go for appeal.     

That apart, following a bunch of petitions by defaulting borrowers, in April 2019, the SC declared the RBI circular dated February 12, 2018 – this was the cornerstone of the insolvency process shepherded by the banking regulator - unconstitutional.

As a result, the RBI was forced to come up with a revised circular dated June 7, 2019, that gave too much leverage to the lenders/banks. It has created a scenario where they are neither under any compulsion nor have any interest in referring the NPA for resolution under IBC.

Still, the IBC framework has brought about a fundamental change in the behaviour of the borrower.

By instilling a sense of fear that continuing default could result in his losing control over the firm, it has forced a large number of them to clear all their dues. Besides, a series of governance reforms implemented in PSBs have galvanized banks to promptly recognize and report stressed assets and take stringent measures for their recovery. To conclude, far from letting defaulting industrialists and businessmen go off the hook, the Modi – government has made unstinted efforts to make them pay up and also ensure that no new NPAs are created.

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