Why in news?
Parliament's Estimates Committee on public sector banks headed by Raghuram Rajan released its report recently on NPA’s.
What are the contents of the report?
- It says that gross NPAs of banks rose to Rs 10.3 lakh crore in FY18, or 11.2% of advances.
- Reasons for rising bad loans -
- Over-optimism - Banks extrapolate past growth and performance of the companies that made them to accept higher leverage in projects.
- Slow Growth - Domestic demand slowdown after GFC crisis (2008) affected strong demand projections.
- Government decision-making - Governance problems as in allocation of coal mines, Project cost overruns etc., made projects unable to service debts.
- Loss of Interest - Banks’ deceptive accounting by failing to restructure and recognize losses or declare the loan NPA, to make the business look profitable to the shareholders.
- Malfeasance - Lack of an independent analysis in the system which multiplies the possibilities for undue influence.
- Fraud – Increase in the number of of fraud cases in PSBs.
- RBI’s rationale to introduce schemes
- The Debts Recovery Tribunals (DRTs) were set up to help banks recover their dues speedily without being subject to the procedures of civil courts.
- The SARFAESI Act was setup to enable banks a to enforce their security interest and recover dues even without approaching the DRTs.
- Yet the recovery was only 13% of the amount at stake and only 25% of these cases were disposed off during a year.
- So CRILC was created, that includes all loans over Rs. 5 crores, to identify early warning signs of distress in a borrower such as habitual late payments.
- Joint Lenders’ forum was created to decide on an approach for resolution, while giving the opportunity to exit for unconvinced borrowers.
- 5/25 scheme was created to establish reliability on projects that have long dated future cash flows.
- Strategic Debt Restructuring (SDR) scheme to enable banks to displace weak promoters by converting debt to equity.
- All these tools effectively created a resolution system that replicated an out-of-court bankruptcy.
- Importance of recognising NPAs
- To restructure or write down loans, the bank has to recognize it has a problem i.e classify the asset as a Non Performing Asset (NPA).
- Only then the bank balance sheet will represent a true and fair picture of the bank’s health, as a bank balance sheet is meant to.
- RBI’s role in creation of NPAs
- Bankers, promoters, and circumstances create the bad loan problem.
- The RBI is just a referee, not a player in the process of commercial lending.
- Reason to initiate the Asset Quality Review
- Banks were simply not recognizing bad loans, neither were they following uniform procedures.
- Hence, Asset quality review was done to ensure every bank followed the same norms on every stressed loan and to look for signs of ever-greening.
- Reason for NPAs even after AQR
- Risk-averse bankers
- Lethargy of promoters before Bankruptcy Code was enacted, hoping to regain control though a proxy bidder, at a much lower price.
- The government’s delay on project revival etc
- RBI should probably have raised more flags about the quality of lending in the early days of banking exuberance.
- It should have initiated the new tools earlier, and pushed for a more rapid enactment of the Bankruptcy Code.
- RBI could have also been more decisive in enforcing penalties on non-compliant banks.
Source: The Indian Express