Bad loans, a problem of bank attitude

There is no dearth of laws to tackle non-performing assets (NPAs) of banks — such as the Sarfaesi Act (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) , the Debt Recovery Tribunal (DRT) Act, the Companies Act and bankruptcy laws for assets recovery and winding up processes.

Each time the issue of NPAs takes centre stage, banks and regulators are seen firming up policies to “effectively” deal with NPAs and tackle wilful defaulters. In the process, several circulars have been issued since 1991-92.

Despite several such measures by the regulator and banks, there is no respite in the surge in NPA and restructured accounts, particularly in the Micro Small and Medium Enterprises (MSME) and corporate sector, raising fears of a lurking loan contagion.

Does this mean that the bankers are not doing their job?

The present mess of bad debts and its impact on entrepreneurship has reached stratospheric proportions.

Above all, the borrower is not being dealt with in a fair and transparent manner. It is as if he or she alone is responsible for getting the project on stream, despite all the lacunae in bank sanctions and weaknesses in the broader system.

In most cases, it is observed that when the borrower needs support with timely resources, banks tend to withdraw the existing support, forcing the borrower company to collapse altogether.

It is well known in the financial sector that some top executives of banks often bad-mouth borrowers and threaten them with dire consequences when they call on them, without even realising that things have come to such a pass also because of bankers’ own failure to take timely decisions.

Bankers often insist that the account be regularised first, without understanding the fact that if the borrower had had the cash flow, he would not have reached this situation. In this manner, accounts are allowed to become NPAs.

Efforts to ensure timely decisions by banks and provide adequate credit for meeting the requirements of the borrowing companies are necessary for the healthy growth of the banking sector and for putting the economy back on an even keel.

Instead of calling the borrower for an early resolution and looking into the possibility of restructuring in an appropriate manner, banks try to assign the debt to asset reconstruction companies (ARCs).

And ARCs, in turn, call the borrowers and settle accounts with them. Why do banks prefer to pass the buck? Assignment of debt is done along with the underlying security.

After that, ARCs are supposed to pay only 5 per cent of the value of debt and the remaining has to be in form of security receipts only.

In the process, the bank gets the benefit of assignment of debt in the form of reduction in its NPAs. Despite no real recovery for the bank, this transaction reduces the gross and net NPAs of the respective bank and helps its NPA management process.

This is a preferred route now for banks because it skips accountability of the bank officials in settling the account.

It is given to understand that even failed (corporate debt restructuring) CDR cases are under the scrutiny of CBI. Hence, it is easy to deal with an ARC, even if the bank has to make do with lower repayment.

As ARCs are private entities themselves, they cannot be subjected to scrutiny by investigative agencies — whatever the settlement amount with the borrower. They do not even need any specific prior reference to the bank on that score.

However, usually, the bank is in a better position to take a decision on settlement of a loan with the borrower, having dealt with the borrower company for so many years.

That said, the decision of the bank’s internal committee should not be brought under scrutiny of any agency, if the regulator and the Ministry of Finance want to resolve the issue of NPAs.

The recent guidelines issued under the ‘Framework for Revitalising Distressed Assets in the Economy’ has addressed some critical issues, mainly emphasising that the banking system should recognise the financial distress of loans early (earlier it was health code 1&2), take prompt steps to resolve them, and ensure fair recovery for lenders and investors.

It has also tightened some of the risk management processes by asking banks to do an independent analysis of the borrower, instead of entirely relying on the recommendations of external agencies.

Outside consultants preparing project reports for the borrowers, including some rating agencies, based on whose reports/ rating banks and FIs take final decisions on providing credit to a company, have never been made accountable to banks.

However, the overall effectiveness of loan appraisal systems and risk management systems in banks leave much to be desired.

Now, the time has come for creating an atmosphere of consultation, confidence building and identifying the genuine corporate borrowers who are in need of timely support, rather than creating one more layer of papers in the form of circulars and guidelines.

Adding more layers of guidelines will only encourage the process-driven model, discouraging CMDs and EDs of public sector banks from adopting innovative ways of tackling various issues.

Sprucing up the mechanism within the banking system and making all stakeholders in charge of these activities accountable is an urgent requirement. Hold them accountable, but do not expose them to nit-picking.

Ultimately, banking is a business and official decisions are business decisions.

The writer is former CMD of Corporation Bank