Non-performing assets, or NPAs, are assets which are categorized by a bank or a financial institution as sub-standard, doubtful or lossy assets. They do not yield any returns to them.
2G scandal and the consequent cancellations of licenses by the Indian supreme court will expose more such Asset imbalance. This write-up attempts to analyze the extent of NPA issues the country faces.
The gross non-performing assets (NPAs) of 37 listed banks has gone up to Rs 1.06 lakh crore (Rs 1.06 trillion) during the September quarter (2011) from Rs 79,078 crore (Rs 790.78 billion) in the corresponding period last year (2010). As per RBI, the total NPAs for public sector banks from 2008 to 2011 have been steadily increasing from 39749 to 71047 crores (Rs). It was 57301 crores (Rs) in 2010. Unfortunately, RBI declares only macro statistics and no detailed conclusions can be made from these statistics. High NPAs is one of the reasons why Moody's has assigned BAA3, the lowest investment grading rating, to India. The rating agency downgraded the outlook for the Indian banking system to 'negative' from 'stable' saying that economic slowdown would impact asset quality, capitalisation and profitability.
These NPAs have to be written off when the recovery cannot be made. In 2010, CBI was looking at whether the one-time settlements these government banks entered into with borrowers were meant to pre-empt investigation into allegations of corruption. Together, all public sector banks (PSBs) have written off almost Rs 26,000 crore in bad debts from 2007 to 2010. In a similar move, Indian banks have written off a whopping Rs 44,767 crore in the last five years (between 2000 and 2004) stuck in non-performing assets (NPAs).
The main reasons for the increase in NPAs could be the following -
1. Loans to real estate, mining and other infrastructure industries that have not been able to service their loans.
2. Favoritism to agriculture and other priority sector for pleasing political vote banks.
3. Loans designed to please "political" families.
4. The current currency fluctuations also affect the Letter of Credit defaults by importers that banks guarantee.
When a loan is sanctioned to any individual / proprietary concern/partnership firms/private or public companies the following aspects are taken into account -
1. Integrity of the promoters and their background.
2. Primary security of the project funded assets ( including the amount spent by the promoters as their equity ).
3. Sometimes other collateral (movable/immovable) belonging to the promoters/close relatives/friends.
4. Hypothecation (practice where a borrower pledges collateral to secure a debt ) of stocks including receivables.
5. Personal guarantee of the promoters.
In some cases, when the borrower is political connected, the bank waives obtaining collateral securities. The promoters then furnish inflated bills ( to cover up their share) and also make arrangements with machinery suppliers to overstate the invoices. They can then take an agreed upon percentage from the banks without putting any contributions from their side. Since, the factory/venture was meant just to siphon out money, the unit becomes sick and the bank has to acquire the unit under Revenue Recovery Act.
Following are the steps to recover the dues of the bank -
1. Auction the unit.
2. Handing over the unit to some other parties who are well-experienced with some addition loan/concessions.
The bank is usually not suited to affect the recover the dues from a sick unit. The amount of liability may not be recovered in full as the plant and machinery might have become obsolete. The auction notice indicates the floor price which is normally equivalent to the outstanding liability. They invite biddings in sealed envelopes and hand over the unit to successful bidder in the event of Bank getting the full money. In India, nobody quotes the floor price expected by the bank and the bids would usually be 25-30% of the floor prices. This stalemate continues for a long time. In the meanwhile, the originally promoter negotiates with bank through a third party ( his "benami" partner ) and using all this influence for a lower sum, takes over the unit.
So, the person who originally took the loan for running a factory, uses the loan for siphoning cash, then through the convoluted mechanisms, takes over the same machinery at a much lower cost.
The Banks are forced to recover at least a partial amount as they cannot recover any money.
Now, this modus operandi can be controlled and its affect minimized by adopting following -
1. Making it difficult to open "benami" accounts. "Know Your Customer (KYC) - Anti Money Laundering guidelines" instituted by RBI in 2002 has helped curb money laundering and funding dubious/terrorism related funding channels. The banking systems do not allow anyone to open an account without providing the details like passport, driving licenses, Tax identification, etc. This has been well-implemented by the banks.
2. Restricting withdrawals of more than 25 lakh rupees from loan accounts without authorization and adequate documented reasons. This has also been mandated by RBI.
3. The banking secrecy laws as provided under the Reserve Bank of India Act specifically debars lenders from parting with information on borrowers to anyone else except to the central bank itself and that too when specifically called for under a prescribed format. However, information can be shared with the specific consent of the borrowers, which is often hard to obtain. If the law is amended to declare a list of all loan defaulters, it will be under public domain and open to scrutiny. The "policial" loans would be drastically reduced. This does not come under RTI too.
4. The loan recovery process from the owners can be made more efficient. Usually, when the promoter defaults, he/she would move his movable/immovable assets to his kin and it is difficult to attach the property of his kin.
These defaults come to notice only when the unit/asset is up for auction. CIBIL(Credit Information (India) Limited ) provides information only on suit-filed accounts that have been provided by the lenders to it at present. his again is limited to defaults of Rs 1crore and above and other suit-filed accounts of wilful defaulters of Rs 25 lakh and above. CIBIL is a four-way joint venture set up over a year ago between State Bank of India, Housing Development Finance Corporation, Dun & Bradstreet Information Services India Pvt Ltd and TransUnion International Inc. The primary task of CIBIL is to gather credit-related information regarding individual and corporate or commercial borrowers and maintain a database of such information. The bureau then sells the information in the form of credit reports to a closed user group of lenders for a price. This report would be one way to determine the major defaults.
In general, the defaults are hurting the country badly. The nexus between the "influential" class and the "political" elite is undermining the efficacy of the banks. Case in point is the allegation that President Pratibha Patil's brother was involved in the a "bad" loan of 60 crores (Rs) for a sugar factory. (see reference 7 below)
Repealing/Modifying the Banking secrecy act to allow for more detailed disclosure will be one major step towards reducing the NPA load on the banks.
Sources and References:
1. http://www.rediff.com/business/slide-show/slide-show-1-indian-banks-with-highest-npas/20111122.htm
2. http://www.thehindubusinessline.in/2003/03/13/stories/2003031302550100.htm
3. http://www.rbi.org.in/scripts/annualpublications.aspx
4. http://ramanan50.wordpress.com/2011/11/22/banks-with-bad-debtsnpa-full-list/
5. http://articles.timesofindia.indiatimes.com/2010-11-29/india/28232413_1_write-offs-public-sector-banks-psbs
6. http://www.indianexpress.com/oldStory/70177/
7. http://www.moneycontrol.com/news/wire-news/sugar-factory-controlled-by-prezs-brother-to-be-auctioned_650181.html
