In the article Towards prudent banking in the Business Line edition dated February 27, 2013, it is exclaimed that a hue and cry is being raised at the current level of NPAs at 3-4 per cent, while they were at 14.5 per cent in 1994.
The comparison may not be justifiable since the regulatory environment and market perceptions both within and and outside the country were vastly different in the 90s. A new era in banking history was heralded when the income recognition and provisioning norms for NPAs were introduced in '94. That was the time when a majority of the banks was in the public sector. They were not required to observe strict capital adequacy norms and not dependent on capital markets for capital. Rating of banks or their products was yet to take off. Loans in default were allowed lot of leeway, sometimes extending to years, before recognising them as problem accounts (christened as NPAs only around the same time) and seriously initiating any recovery proceedings. There was no way of monitoring the accounts in default as computerisation of banks was still in a nascent stage and core banking or net working of branches was a far cry, at that time.
The ratio of 14.5 per cent NPAs represented the accumulated position over years when there was no system to recognise, segregate or consider any special or urgent measures to contain or reduce them. Banks were not in a hurry to recover the dues by making sacrifices or entering into compromises, now popularly known as OTS (one-time settlements). In practice, it is neither a single payment nor a full settlement of the account, with an agreed amount of sacrifice. Payments are made in installments nullifying all the calculations made to justify the compromise. Many times the loss of interest on the delayed payments is not reckoned and the OTS turns out to be a fresh interest-free term loan!
Until the 90s efforts were aimed at recovering the full amount or at least the full value of the various assets, whether charged to the bank or otherwise, no doubt after prolonged legal battles. The compulsions to reckon the NPA ratios were absent and sacrifices or write-offs were a taboo, though not a rarity.
Today, two major factors dictate the need to reduce the NPAs through several routes. First, the fear of ratings and the market image and, second, the logic that the costs and time involved in pursuing the legal action are high. The time value of the money matters, too. Access to information on assets or the assets themselves is considered difficult. Many times the borrowers themselves are 'not traceable'. The proportion of unscrupulous borrowers using their money, muscle and political power to frustrate the efforts of the banks is also high.
Conceding all that is said is justified, the undue anxiety to 'reduce' the NPAs is not. Recovery through coercive and legal action is welcome. But allowing the borrower-defaulters to get away with huge benefits may not be. As per the accounting norms, once an account turns an NPA further interest is not debited to the account and it virtually doesn't appear in the books of account. Invariably, the waiver of this accrued but undebited interest amount is taken for granted. Then the unrealised (unpaid) interest already due and debited, which in the first instance is the cause for the NPA, too is given up. The efforts by the banks to recover the dues as evidenced by the numerous suits pending before the DRTs and the large number of SARFAESI Act cases can't be ignored. But banks seem to be reaching a dead end here. Nevertheless negotiations take place with the borrowers for further sacrifices and accept whatever the defaulters graciously offer to pay. To dub the losing battle a tactical retreat, non-availability or negligible value of the various securities, the weak title to the charged properties and the torturous process of the legal pursuit are cited.
The cost implications
It is in this context the cost of pegging the NPA ratios at 3-4 per cent levels has to be understood. The sacrificed or written off amounts impact the profits and to that extent the ability of banks to raise internal resources. These amounts were available to the banks till the 90s, even after reckoning the cost of funding the NPAs, which too were taken in to account while finally settling the accounts. We can't justify putting good money after bad money by indefinitely keeping the litigation alive or delaying the possible recoveries or settlements through negotiations. But it has to be realised that the cost to the Nation, and to that extent, undue benefits to willful defaulters, are substantial today, compared to the 90s. This is in line with the general fall in values in public life, and, not necessarily an exception.
Not worrying about the details or their accuracy we can make a quick assessment of the amounts. In '94, the outstanding credit of banks was Rs 1,68,338 crore, which increased to Rs 2,08,819 crore in 94-95. At a cumulative level of 14.5 per cent, the NPAS were Rs 25,250 crore and to bring them down to 3.5 per cent, an amount of Rs 16,833 crore was required to be recovered. Assuming that about half of it was recovered in cash, Rs 8,416 crore would have been sacrificed or written-off.
For 2012, the credit figure was Rs 42,98,704 crore and the NPAs at an average of 3.5 per cent were Rs 1,50,455 crore. The percentage growth of NPAs each year, particularly during the past few years, has been more than the growth in credit, which has been around 18 per cent. Even if a minimum of 1 per cent of the outstanding credit turns into NPA and half of it is recovered in cash, to keep the NPAs at the same respectable (?) level the sacrifices could be Rs.20,000 crore for the system. Over the past two decades the earnings of banks might have suffered loss of the order of Rs 2 lakh crore, much more than what the banks are required to bring in by way of capital over the next few years to comply with the Basel-III requirements.
(The author is a former Managing Director of State Bank of Mysore.)