Shed ivory tower approach to NPAs

The recent announcement by the Reserve Bank of India, meant to limit individual banks’ exposure to corporate borrowers, has given rise to apprehensions. The RBI also aims to restrict overall exposure of banking system to large borrowers gradually to ₹10,000 crore by April 1, 2019. It would seem that the RBI guidelines are approaching the NPA problem from the wrong end.

The increased risk weights for exceeding the permissible limits may prove a big burden for both borrowers and bankers. Beginning 2017-18, corporates requiring loans in excess of ₹ 25,000 crore have to raise 50 per cent of the excess amount directly from the market. This amount will be reduced to ₹15,000 crore in 2018-19 and to ₹10,000 crore from April 2019. The RBI Governor has advocated “pragmatism” in dealing with NPAs. The regulator should also revisit the asset classification and provisioning prescriptions and reorient them towards prevention of NPAs rather than delaying or facilitating their exit from balance sheets.

The ability of corporates, who suffer a credibility gap and have low investment ratings, to raise funds from the market is limited. The impact on infrastructure development will, therefore, be severe.

Even as huge write-offs of loans in the last few years might have brought down the absolute levels of NPAs, credit expansion has been stagnating, while provisioning requirements are still on the ascent. For writing off loans, where only partial provisions were made as per RBI norms, additional provisions are to be made out of the earnings.

The scope for extending credit to the retail sector is not unlimited. Virtually all banks are shifting their focus to MSMEs. Intrinsically, the margins on retail lending are low and the rush to garner a share of the market will only lead to dilution of quality and higher risks. The eagerness of governments and political parties to write off agricultural loans doesn’t enthuse banks to expand lending to farmers.

The other option for banks is to invest in securities even beyond SLR. With the Government having decided to moderate their borrowings to rein in the fiscal deficit and the RBI lowering the repo rate, the scramble to invest in securities will take the already low yields further southward. The cost of funds for the banks continues to be high and the yields may dip below cost.

The hope that bond markets will improve is belied as bankers, traditionally risk averse and wary of increasing NPAs and the fall out of investigations, will be further constrained by the RBI credit guidelines and instead flock to safe securities. Only private corporates with good credit ratings — those in the market because of the latest RBI rules on exposures — will enter the bond markets.

The basic issues plaguing the credit portfolio are the quality of assets and post-sanction credit management. A positive outcome of the restrictions would be that banks cannot expand credit merely by joining the bandwagon of consortium lending.

Apart from one or two major banks which carry out a thorough appraisal, others hardly carry out a due diligence exercise. If quality is to be ensured, consortium discipline needs to be redefined. The number of banks in a consortium too should bear some relation with the amount of loan. Besides, banks and more specifically the executives involved should have sufficient expertise in the relevant field. The disbursement of funds and scrutiny of their utilisation during project implementation is mostly reduced to a formality, banks either depending on the certificates of borrowers’ auditors or deriving comfort from the fact that funds are released to the lead bank.

A perfunctory visit by a team of branch level officials, many of whom may not have adequate knowledge of the projects being implemented, doesn’t help matters. The inspection of assets created will be meaningful if the visiting officials spend more time on the field, and not merely focus on papers and books. Banks also employ external auditors for assets or stock verification. While outsourcing of credit management is inevitable when the lenders do not have the necessary expertise or manpower, this should not translate into abdication of responsibility.

The practice of credit committees sanctioning loans needs a relook. While an individual exercising the sanctioning powers carries some responsibility, virtually no accountability attaches to the committees. Most banks have opted for centralisation of loan processing, the latest innovation being the applicants submitting loan applications online. It helps improve transparency and in expeditious disposal of proposals, but the role of the field level functionaries gets diminished.

The process provides for quantitative information but qualitative aspects do not find a place. Inputs from the branch, on the borrowers’ background and other relevant ground realities, which are crucial in assessing the risks, are not given due weightage.

Adoption of digitisation beyond a point may prove counterproductive. With virtually no say in sanctions, branches tend to play a dormant role in credit management. Even the Narasimham Committee on rural credit emphasised the “local feel and familiarity with rural problems”.

Asset classification is removed from the ground realities. It requires servicing of interest on loans every month. In practice no buyer, including big corporates or government departments, pays dues promptly for goods and services.

It would be a dream for a farmer to realise proceeds of his crop at the end of a season from a trader, sugar mill or a procurement agency. The short period of one month or 90 days is inadequate to analyse the reasons for default and assess the genuine requirements of the borrower. Wilful default should always be dealt with treated sternly.

Once an asset is branded an NPA, the attitude of both banks and borrowers changes. With banks unwilling to revive the accounts, borrowers try to shift their operations to other banks or agencies.

Accelerated provisioning and better coverage ratio only hasten write-offs, providing an easy route for reducing NPAs at enormous cost to the entire system. The regulator has to play a more proactive role in prevention with more supervisory oversight on credit management in banks, rather than more regulation.

The writer is a former MD of State Bank of Mysore