Welcome policy shift in managing NPAs

More important than the repo rate cut and the emphasis on growth in the recent monetary policy announcement was RBI Governor Urjit Patel’s emphasis on “pragmatism” in dealing with non-performing assets of banks. He acknowledged the fact that banks had lent their balance sheets in 2007-08 to investments in infrastructure and that five core sectors contributed 61 per cent of the stressed assets.

If one were to go by the semantics of his statement, words like “creativity”, “thoughtful endeavour” and “skill” rolled off while he spoke about the need to find a resolution for NPAs. More significantly, he said that the Government and the RBI would work “together” to disentangle the mess. From a commercial banker’s standpoint, this indicates a refreshing change in the regulatory approach to the problems confronting public sector banks.

It was not long ago that the “establishment” had been critical of banks in their lending practices, especially to the infrastructure sector. An advisor to the Planning Commission (since wound up) went to the extent of writing to the Indian Banks Association, complaining against what he called “banana banking”.

Then came the call for the cleaning up of the banks’ balance sheets and the now-famous Asset Quality Review (AQR). Though it did bring out borderline accounts, which were kept as performing assets, into the open, the exercise lacked comprehensiveness and thoughtfulness, as no one really knew how to resolve the bad loans. It is an open secret among bankers that, in the Indian context, once an account is classified as an NPA, they would be loathe to extend further credit or support to that unit, as they could be later on accused of throwing good money after bad.

So, after AQR, most of the large accounts were like patients in the ICU, with just ventilator support. Only minimum plant level operations were being conducted in manufacturing units in sectors like steel and textiles with the cash proceeds being routed through what are called Trust and Retention Accounts. In the case of infra projects too, the story was no different.

The classic example of what could arguably be called ‘regulatory overreach’ was the decision to ask banks to provide for their exposure under food credit to the Government of Punjab. Thankfully, no further decisions on the same lines were made. For, there are a number of State governments which have not honoured their invoked guarantees for loans to State-level PSUs, but banks continue to subscribe to their securities and they are reckoned as part of the Statutory Liquidity Ratio norms. A logical extension of the same approach would have been to take such State securities out of SLR.

It may not be out of place to mention here that the average Indian has more trust and belief in “Government” per se than arms of the same “establishment”. The trust-level of the ordinary saver in government is high. Else, there would have been a run on banks like United Bank of India, two years ago, when that bank reported high losses. Or a bank like Indian Bank, almost a decade back, when it was in dire straits. This faith ought to be nurtured and not undermined by regulatory actions, both through emphasis on adequacy of capital and public pronouncements.

After all, the Indian public sector banking system, led by the redoubtable State Bank of India, has been at the centre of high economic growth post the 1991 reforms. They still retain the “commanding heights”. As the chairperson of India’s largest lender and banking thought-leader, Arundhati Bhattacharya had said on so many occasions, ‘who would have lent for infrastructure — the airports, the power projects, roads, et al – if the PSU banks had not’.

This helped banks such as SBI to continue to remain at the forefront of the Indian growth story. The same, unfortunately, cannot be said of so many other sectors like telecom, aviation and to a certain extent, power, which has witnessed the total withering away of the public sector. This shows the latent potential and power of our public sector system. It is in this context that the RBI’s latest move to work “in tandem” with the Government for NPA resolution needs to be seen. The hope is that a more practical regulatory approach would be adopted for resolution of stressed assets.

The announcement regarding a relook at the Scheme for Sustainable Structuring of Stressed Assets (S4A) by Deputy Governor, NS Vishwanathan, known in banking circles for his pragmatic and empathetic approach, offers hope for the six troubled sectors that the Governor highlighted. It proved to be a non-starter mainly because it envisaged a minimum of 20 per cent provisioning and no asset status upgrade. In short, there was no incentive for any bank to have a hard look at such proposals once the account had turned an NPA.

The restriction regarding the minimum level of sustainable debt being a minimum of 50 per cent was also a stumbling block in its implementation. One hopes that a reduction in this norm will be part of the detailed guidelines proposed to be issued before the end of this month.

Assuming that there is no minimum stipulation and in the worst-case scenario, only 25 per cent of the debt being found sustainable, what a revised S4A can do is to free up at least a lakh crore from the NPA category. That would provide a silver lining, in an otherwise overcast scenario. One swallow may not make for a summer. But there can’t also be a summer without swallows. Just this one announcement of a re-look at S4A and the phraseology of the new Governor hints at a major harbinger of change in the horizon.

The writer is Chief General Manager with State Bank of India. The views are personal