Easier said than done to reduce bad loans

The Finance Minister’s direction to all public sector banks to reduce their bad loans to one per cent of their total advances by the end of the current year is, to say the least, impractical. Bankers do not have a magic wand with which they can sweep away all bad loans.

The reasons for the proliferation of bad loans are multifarious. For instance, the Kingfisher Airlines account went bad because of the unplanned expansion/acquisition without proper tie-up of funds. With little security to back the huge debt, banks appear to have little option but to take the write-off route and push the whole murky affair under the carpet.

As has been rightly said, with the economy registering the lowest growth in a decade, units are bound to become sick and loans bound to turn bad. A mere prescription by the Government to the banks to reduce the bad loans without attacking the root cause — the sluggish growth in economy — will not serve any purpose.

With the monsoon failing in most parts of the country, most of the agricultural loans are bound to turn sour unless the Government comes up with another loan-waiver gimmick. Loans worth crores of rupees under Government-sponsored schemes turn sour because these are unviable and made under political pressure.

Barring a few States such as Gujarat, most of the others are facing the problem of acute power shortage and prolonged power cuts. With the cost of power generated using diesel generators being much costlier than grid power, many units are unable to sustain production and find it more profitable to close down the units. How are the banks to recover the money locked up in such units?

On paper , there are many avenues available to banks to recover bad loans — the legal route through civil courts, Debt Recovery Tribunals in the case of loans above Rs 10 lakh, Sarfaesi Act, Lok Adalats, Revenue Recovery Act, and so on.

Time delays

The time taken for recovery through civil suits is better left to one’s imagination. Though DRTs are expected to pass final orders within six months, there are cases that have not been decided for decades for various reasons like appeals, counterclaims, stay orders, non-posting of presiding officers, and so on.

Even if the final orders are passed, there is still the question of sale of security through recovery officers which takes enormous time. Though banks have been given powers under the Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities) Act to recover money by selling the securities without the intervention of the court, the success rate is less than 50 per cent due to various reasons such as insufficient security, passing of stay orders by courts not competent to do so (which can be undone only by going to a higher court), delaying tactics by borrowers, and so on.

The top 30 non-performing assets (NPAs) make up close to half the bad loans of 19 nationalised banks. By the time the account of the big borrower becomes stressed, the unit would have incurred considerable cash losses and the entire primary security for working capital finance would have been eroded.

Receivables become non-recoverable once the unit is in trouble and is unable to supply materials to customers. In the case of term loans, by the time the account is classified as an NPA, a minimum of three months’ instalment and interest would have been unpaid. And by the time banks resort to the Sarfaesi Act several instalments along with interest would be in default.

The value of the plant and machinery would have come down considerably by normal wear and tear and obsolescence. The amount realisable by the term lenders by sale of these securities will be next to nothing. So the question of banks which have taken this as collateral security getting anything out of their sale proceeds does not arise.

Strategy in place

Most of the aspects of the multi-pronged strategy suggested by the Finance Ministry are already in place in most of the public sector banks.

A mere review even by the highest body is not going to solve the vexatious problem unless the Government takes immediate steps to improve the economy, eliminate scams and political interference, give effect to the repeal of SICA (Sick Industrial Companies Act), plug the loopholes in the various laws pertaining to recovery, ensure adequate power generation and create a conducive atmosphere for the smooth running of the industries.

(The author is a former Deputy General Manager of State Bank of Travancore and State Bank of Mysore.)