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SBI cheers but the 'demon' of NPAs still roams free

Tuesday, November 06, 2018
By Jagdish Rattanani

SBI is India’s largest bank. It’s Managing Director and CEO Rajnish Kumar is celebrating a truly happy Diwali this year. On Monday (Nov. 5), he is reported to have announced that as far as his bank is concerned, “we have complete control over the demon of NPA.” The acronym, of course, stands for Non-Performing Assets, which is bank-speak for loan accounts that are in default for 180 days or more and usually offer little hope of turning into regular accounts again. It is true that NPAs are the demons plaguing not just SBI but the entire banking sector of the nation. Take SBI alone: Its gross NPAs declined from Rs. 2,12,840 crore as on June 18 to Rs. 2,05,864 crore as on September 18, whereas Net NPAs declined from Rs. 99,236 crore to Rs. 94,810 crore during the same period. The Gross NPA ratio stood at 9.95 per cent, down from 10.69 per cent over the previous quarter. The Net NPA ratio is at 4.84 per cent, down from 5.29 per cent over the previous quarter. Dalal Street celebrated; the Sensex was flat but the SBI stock celebrated and jumped 3.45 per cent, reflecting the mood of the CEO and the upbeat comments as the results hit the markets. Net profit fell over 40 per cent year-on-year to Rs. 945 crore for the July-September quarter, but was still higher than the analysts had estimated. In short, the bank did well and the CEO made it sound even better.  He said profit was modest but there was no looking back as resolution of stressed accounts picks up pace.

NPAs across banks
The results will bring some much-needed festive cheer at a time the NPA demon is wreaking havoc across the nation, and NPA talk has become the staple of conversations and efforts towards its resolution a part of the dispute that is now raging between the Reserve Bank of India and the government of India. To understand the magnitude of the problem, it bears repeating that the SBI (Gross) NPA problem in itself is of the size of Rs. 2 lakh crores. True, the celebrations are for the claim that the worst is over but looked at in absolute terms, the number and how it has ballooned over the last few years still boggles the mind of the ordinary citizen. Overall, across the Indian banking sector, the NPA problem is said to be of the size of Rs. 10 lakh crores. It has crossed all red flags for at least 12 banks, 11 of them public sector banks, which have no good news to offer yet. These public sector banks jointly have Gross NPAs that total an astounding number of Rs. 3,46,919 crores, or Rs. 3.47 lakh crores, as on June 2018. The 11 public sector banks contributing to this number are: United Bank of India, Indian Overseas Bank, IDBI Bank, UCO Bank, Dena Bank, Central Bank of India, Bank of Maharashtra, Oriental Bank of Commerce, Corporation Bank, Bank of India and Allahabad Bank. The one private sector bank is Dhanalakshmi bank. The 12 are special because they have been brought under special regulations called the Prompt Corrective Action (PCA) framework in force now.

In banking circles, it is easy not to be fazed by such large numbers. NPAs happen. Default is part of the risk of issuing a loan. If banks wanted zero default, they must make zero loans because one can never have any fool proof guarantee against a loan going bad. Also, the argument often offered is this one: loans go bad because the business cycle turned, or because of other conditions that changed or delayed the project and made it unviable. In the case of large loan accounts in the infrastructure sector, and in particular the power sector, this is indeed true in most cases.  

Lending risks
Dr. Raghuram Rajan, the RBI Governor from 2013 to 2016, put it well in a speech at ASSOCHAM in June 2016: “The truth is, even sensible lending will entail default. A banker who lends with the intent of never experiencing a default is probably over conservative and will lend to too few projects, thus hurting growth. But sensible lending means careful assessment up front of project prospects, which I have argued may have been marred by irrational exuberance or excessive dependence on evaluations by others. Deficiencies in evaluation can be somewhat compensated for by careful post-lending monitoring, including careful documentation and perfection of collateral, as well as ensuring assets backing promoter guarantees are registered and tracked. Unfortunately, too many projects were left weakly monitored, even as costs increased. Banks may have expected the lead bank to exercise adequate due diligence, but this did not always happen. Moreover, as a project went into distress, private banks were sometimes more agile in securing their positions with additional collateral from the promoter, or getting repaid, even while public sector banks continued supporting projects with fresh loans. Promoters astutely stopped infusing equity, and sometimes even stopped putting in an effort, knowing the project was unlikely to repay given the debt overhang. The process for collection…has been prolonged and costly, especially when banks face large, well-connected promoters.”

This is putting it to industry as bluntly as Rajan probably could have done at the time.  The two significant points that he mentioned: weak monitoring, pre- and post- issuance of the loans and the well-connected promoters are rather well understood by everyone in the Indian context. The fact is that due diligence for large borrowers is virtually non-existent. In fact, the banks are ill equipped to weigh in these large infra, power, coal, telecom and other big-ticket projects. Their capacity to look, evaluate, ask the right questions, let alone probe, dig and doublecheck is next to zero. There was a loans mela to industry as infra projects came up and banks lined up to finance them.  The rest of it – the invoicing, the rigour, the check, the balances – are what the banks have remained blind to. When problems did arise, the “well-connected promoters” knew how to postpone the inevitable, to hold on to their equity and get the loans restructured – the so-called ever greening of loans or zombie banking as it has come to be called.

Crack the whip
The only way to fix this rot is to crack the whip. Bankers and promoters both must pay the price. They must be held to account because what they have played with is the money of the ordinary people of India. The Prompt Corrective Action (PCA) framework, which has been tightened by the Reserve Bank of India and specifies stronger oversight and restrictions on lending by the PCA-flagged banks, is a good step and must be supported. The government appears to oppose it. All loans beyond the 180-day default limit must automatically and inevitably go through the bankruptcy process. The government seems not to like that either. Some companies have gone to court over this and the outcome is awaited. Special efforts must be made to name, shame and prosecute those who are willful defaulters and those who have played with project costs and have siphoned money out. In short, there has to be a concerted effort, both by the government and the RBI, to put all the pressure to fix what is a burning problem. In doing so, they will signal respect for due process, encourage the right kind of investment, which will unleash entrepreneurial energies and drive growth. Any attempt to dilly-dally sends all the wrong signals – it supports the inefficient, lets them sponge off public money and will inevitably drive the Indian economy down as cronyism takes root.

(The writer is a journalist and a faculty member at SPJIMR. Views are personal) (Foundation of The Billion Press) (e-mail:

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