Good money down the bad debt drain

| | in Oped

For Make in India to be a success, Indian banks have to be able to give big loans. Currently, their lending ability is limited as funds are tied-up in non-performing assets

Recently, the Reserve Bank of India announced that it is almost ready with the structure of a Central Fraud Registry and the guidelines for sharing information of fraudulent borrowers on a single platform. This will help bankers check the credentials of a borrowing entity while processing loans. Such a registry has become indispensable to infuse ethical elements and build credibility into the banking industry. 

According to RBI data, as of December 2014, the gross value of non-performing assets held by public sector banks had reached Rs2,60,531 crore. About one third of this bad debt came from the top 30 defaulting borrowers.

Rating agency ICRA (formerly Investment Information and Credit Rating Agency of India Limited) estimates that NPA ratios may rise to 5.5-6.5 per cent by June from the existing level of 3.3 per cent, once the revised RBI guidelines on asset classification come into force.

An NPA is basically a loan or lease that does not meet the stated principal amount and the interest amount payments. They are classified into commercial loans, which are outstanding for payment for more than 90 days, and consumer loans which are due for more than 180 days with interest and/or installment of principal being overdue beyond 90 days.

Overdue receivables which remain unpaid beyond 90 days from specified due date for payment also become NPAs. Additionally, the amount of liquidity facility that remains outstanding for more than 90 days becomes an NPA as well.

NPAs are further classified into three categories based on the timespan for which the asset has remained non-performing and the recovery of the dues: Substandard Assets, Doubtful Assets and Loss Assets.

A substandard asset is one which has been an NPA for less than or equal to 12 months. Doubtful Assets have all the characteristics of Substandard Assets and, additionally, are based on currently known conditions, facts, and values that are highly doubtful and questionable. Loss Assets are those that have been identified as such by the bank's internal auditors and the RBI's external auditors but have not yet been written off fully. Loss Assets are considered uncollectible, and have little salvage or recovery value.

Improper selection of borrower's activities, weak credit appraisal systems, industrial problems, inefficiency in the management of borrower, slackness in credit management and monitoring, the lack of proper follow-up, recession and natural calamities cause NPAs to rise.

Within the Indian banking system, diversion of funds for expansion, diversification and modernisation of existing projects, setting up of new projects, time and cost overruns, business failure, inefficiency in bank management and technology issues have also added to the bad debt burden.

Availability of credit is critical for the Modi Government’s flagship Make in India project. Yet, the amount of lending to industry had grown by just 2.1 per cent in the 2014-2015 (as per data available in December 2014) as compared to 8.1 per cent in the corresponding period in the previous year. In the infrastructure segment, consisting power, telecom and roads, lending has increased by only 6.8 per cent compared to 10.3 per cent the previous year.

Government banks need a substantial amount of capital to meet the mandatory capital requirements under the Basel-III norms. All banks have to be compliant with Basel-III capital norms by 2019. Moody's Investors Service estimates that state-run Indian banks would need about Rs2.2 lakh to comply with the Basel-III norms.

Though the Government had committed Rs11,200 crore capital to state-run banks for 2014-2015, only about Rs6,990 crore was provided. Unless the public sector banks, which constitute 70 per cent of Indian banking system, are adequately capitalised, the much-need credit support to industries will not be forthcoming.


(The writer is former Director General, office of the Comptroller and Auditor-General of India)

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