Is the BJP responsible for the NPA problem or was it

created by the UPA? Why all those oppositions blaming the

BJP?

NPA is Non-Performing Asset. It is an euphemism for a loan that was given to an

individual or Corporate which could not get back its interest and the principal. In simple
words, the assessment of credit worthiness of the borrower was wrong, without casting
aspersions on the motives behind the loan.

The issue of NPAs of the nationalised banks had first come to be noted around 2012.
Raghuram Rajan went behind them and asked banks to make a full provision for them if
not in the same year, over 2–3 years. Unfortunately, the skeletons had started to come
out of the cupboard one by one that it continues to rock even in 2018.

The genesis of NPAs is ever since banks got nationalised but became more acute and
pronounced since 2009. If a bank was owned by an entrepreneur, he would be very
vigilant and careful about to whom the money is being lent and how soon it is coming
back with interest. There are instances of borrower being attacked and killed if he
couldn’t pay, with the help of goondas. In essence, money was carefully loaned.

Come the nationalised scheme. The banking business expanded but accountability
shrank. The manager who sanctioned loans was farther away from the one who was to
collect. There was no linkage to measure the performance of a banker on his assessment
of a loan portfolio. Even if there was one, there were no rewards or punishments.

Enter corruption. At each level, loan or its interest and terms of loan were manipulated
thanks to the discretionery power and grey area of sanctioning a loan. Of course, for a
consideration. There were a few here and there doing it, subsequently it became
epidemic. And then the top Managers, with larger loan power and a smaller salary
despite owning good positions, succumbed to this loan sanction for the extra
consideration. Before the loans could come calling for settlement, they would have
retired and gone!

The politician smelt the rat. After all, he appointed all the top heads of banks. One call by
his secretary would fix a loan for his friend who may not be worthy of a loan. A brand
name like Kingfisher was given as a collateral for a loan of Rs. 300 crores! Caution was
thrown to the winds.

There is no point in saying that it was UPA or NDA. It is NPA at the end. When corruption
is in our blood, it doesn’t matter who started it. When it has ballooned to several
thousands and lakhs of crores, the common man is hurt and angry. But the same
common man hailed the move of Nationalisation as the new saviour of the poor.
Politicians and bankers have proved that there is no such thing as a free lunch in the
economy.

To control the NPAs, we need to have scrupulous assessment of credit worthiness. It calls
for two things - integrity and capability. They are in shades with the nationalised banks
today. There can be some quick fix or some remedial solutions but there is a flaw in the
basic structure itself. There has to be a stake in the loan sanctioning authority. Otherwise,
it is only good hope.

Readers may go through a relatively long process of banking narrated below to have a
full understanding of the NPA. Essence has been captured as above.

=========================================================
=======

How large loans/ Credit limits used to be sanctioned in Banks ???

1)There are gradation of branches headed by officers of Scale 1 / Scale 2 / Scale 3 / Scale
4 / Scale 5 . Scale one being the junior most .

2) No bank credit is sanctioned directly from R/O , Ho , or Central Office without the
proposal being received from the Branch .

3) only small retail loans can be sanctioned at branch level . Rest have to be sanctioned
at Regional /zonal / head/ Central Office

4)There are brokers mostly CAs who canvass bank credit of large amounts

It is they who approach the MD / ED / Gm (Credit ).

5) Once they have struck the deal on rate of commission to be palmed , the project
report will b submitted to a branch headed by Scale 4 or Scale 5 executive who will be
telephonically advised by the CO/ Ho. Normally,these Scale 4 Scale 5 heads of branches
are the blue eyed boys of the executives at the R/O , ZO , Head Office And Central Office
.

6) Broker CAs will be advised to approach one of those Branches ( also known as
exceptionally large branches / or Industrial Finance Branches ) . The broker normally
takes the head of the Branch along with the customer to a 5 star hotel where they
discuss the proposal . During the discussions broker makes it obvious that the proposal
has already been discussed at the highest level.

7) at the branch level Regional / zonal office level

There will be a series of letters exchanged raising queries on the proposal . This shadow
boxing is deliberately created to make believe that the proposal has been vetted
seriously .
8)with every query letter there will be a meeting with Branch head / customer / broker
on finalization /guidance as to how each query needs to be replied

9) proposal travels from the branch to R/ o , Zo , Head and Central office where General
Manager Credit will sponsor the proposal in the Committe of executives .

10)) then a sanction letter is issued ‘in Principle “

11) then the customer will be orally advised by the broker to make a representation to
reduce the rate of interest , reduce the margin , dilute the security , increase the length
of repayment schedule .

11) at this stage customer is made to part with the promised price thru the broker .

Sometime it’s paid partially and the Bal to be settled after the first disbursement of the
facilities .

12 ) Final sanction letter comes to the branch and branch feels elated that it’s business ,
profit goes up and the branch is recognized for its great performance and the branch
Head gets promotion at the next earliest opportunity. So on record it’s a business
canvassed by the Branch .

CMD / ED / GM Credit are happy thru the brokers .

Customer is happy as he parts with a 10 % cut or commission from 100% money lent to
him by the Bank .

Broker collects his part of the cut and vanishes in search of another proposal .

Bank lords are happy with the extra income and NO ACCOUNTABILITY as the proposal
has come from the Branch and approved in the Committee of Executives/ Board of
Directors with no individual executive having taken the decision .

13 ) such large proposal reflect in Banks Growth of business , growth of profits

And every executive in the chain gets preferred posting and promotions at the next
earliest opportunity.

14 ) seeing this trend , every other director appointed by the Min of Finance also bring in
their proposal and wash of their hands in Behti Ganga .

Added to this , Finance ministry , other political heavy weights refer cases where they
have vested interests Fr bank facility.

15 ) By about 3 years every one who had involved in this sanction gets elevated to the
next higher positions
16) when the A/c becomes NPA after 3/4 years these very executives who have moved
up in the hierarchy, would handle the papers and cover up for each other and push the
matter under the carpet .

17 ) when the matter really explodes after 7 years 0r 8 years most of the executives

Who had milked the bank would have retired and Vigilance Dept and present set of
executives will be doing the firefighting or shadow boxing .

18) Do you know most of the Bank executives of PSU banks particularlyCMDs / Ed’s / GM
( Credit ) after their retirement, are employed by some corporates ???

19 ) Do you know most of the Scale 7 executives of PSUs have risen from the junior
officer level from a humble start ?

20 ) Do yu know most of them now live in the posh apartments valued at 8to 10
crores ???? Besides owning assets beyond their known income ?

Long time back I was speaking to a chairman of a District Cooperative Bank. He boasted
that his bank had no NPA problem and the recovery of loan amount was almost 100%. I
was truly surprised as I was generally aware of the level of mismanagement in the bank.
Later when I was talking to the lead bank representative in the Cooperative Bank and
one who knew banking, I inquired the secret of such high recovery percentage. He burst
out laughing. Then he revealed the secret. The trick of 100% recovery was giving a
bigger loan to the loanee, adjusting the principal and interest of the previous loan out of
it and disbursing the balance to the loanee. The Bank did not have problem of NPAs at
all.

Our banking system in the state sector has seen decades of interference by political
apparatus, unjustified and unwarranted loan waivers, massive inefficiencies and such
others. Probably, if our banks survive today then we must thank those conscientious 25%
officers and staff of these banks who have worked diligently in very difficult
circumstances. Faced with a political arm hell bent to subvert banking to their narrow
political ends, over a period of time the bank bureaucracy too developed an approach to
find out ways and means to satisfy their political masters. One such way was to continue
give dividends which could be given only by helping NPAs remaining out of the
definition of NPA. Probably, this why bankers kept under collecting the loan servicing
amounts but kept the loans as performing assets.

With the changes in the banking norms the definition of NPAs was implemented more
stringently and the books of the banks started reflecting the true picture more honestly.
Since this happened during the period of NDA rule hence some blame them for the rot.

The fact is that it is a systemic rot which was never tried to be controlled by UPA / NDA
or other regimes of all kinds of descriptions in the last forty five years. In fact the present
government of NDA II allowed the pus to spill out of the wound for the first time. To
blame only UPA or only NDA is wrong. The entire system has been at fault. NDA II is less
so because they have tried to bell the cat.

Income Recognition, Asset Classification and Provisioning Norms were introduced as

part of liberalisation process under Basle Agreement 1988 to which India was a
signatory. The NPA provisioning norms were first introduced in Banks from April 1992
when Late Narasimha Rao was the Prime Minister and Dr Manmohan Singh was his
Finance Minister. It was part of international best practices and the system was
introduced in India to safeguard banking system by depicting their weaknesses through
a transparent mechanism.

The simple rule was if the loan interest and instalments are not recovered for a period of
90 days or more banks will not only earn any interest on it but also provide 20 to 100%
additional provisions on balance outstanding depending on age of the loan as a risk
management exercise. As a result the profitability of banks came down. It became the
prime need of the hour to reduce NPAs through recovery of bad loans.

The main reason why bad loans are not recovered is slow legal process in India. To
expedite the process the Debt Recovery Tribunals were set up and SARFAESI Act was
enacted in 2002 when Shri Atal Behari Vajpayee was the Prime Minister.

The full form of SARFAESI Act as we know is Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002. Banks utilize this act as
an effective tool for bad loans (NPA) recovery.

During 2000 to 2010, India had robust economic growth and rapid increase in bank
advances grew as well as their profitability. However, the process came to a halt in 2011
leading to increased NPA portfolio of banks and decline in bank's profitability.

The Capital Adequacy norms under Basle III became a major issue for banks as they have
to find additional resources within 2018 to remain viable units. In this backdrop six banks
were merged with SBI to contain NPAs in April, 2017 as part of reform process.

In the absence of banks profitability and rising NPAs, the Government have to
recapitalise the public sector banks being their owner and to protect interests of the
depositors. Under these circumstances the Insolvency and Bankruptcy Act was enacted in
2017 to reduce NPA level by the present Union Government under Prime Minister Shri
Narendra Modi and his Finance Minister Shri Arun Jaitley.

“The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which
seeks to consolidate the existing framework by creating a singlelaw for insolvency and
bankruptcy. A strong insolvency framework where the cost, time, incurred is minimised in
attaining liquidation has been long overdue in India.”

Under these circumstances it is pointless to blame successive Governments for increased

NPAs in Banks. It is a question of health of Banks where wealth of the Nation is stored. It
should be the concern of every Government to recover the dues to protect the interests
of the people. Accountability should be fixed at every level so that bad loans are reduced
to acceptable levels instead of destroying the Banking system.

What could be an effective solution for removing the NPA problem in India?
Answer
Follow
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Request

The best possible step for removing NPAs is “Prevention is better than the cure”

The two main point strategy of preventing slippage of standard assets into NPA category
and reducing NPAs through cash recovery, up gradation, compromise and settlements.

Preventing NPAs

1. At the pre-disbursement stage, appraisal techniques of bank need to be

sharpened. All technical, economic, commercial, organizational and
financial aspects of the project need to be assessed realistically. Bankers
should satisfy themselves that the project is technically feasible with
reference to technical knowhow, scale of production etc. If you sanction
more than the actual requirement the chances of going that account into
NPA is always HIGH.
2. A major cause for NPA is fixation of unrealistic repayment schedule,
repayment schedule may be fixed taking into account gestation or
moratorium period, harvesting, income generation, surplus available etc.
If the repayment schedule is defective both with reference to quantum
of installment and period of recovery, assets have a tendency to become
NPA.
3. At the post –disbursement stage, banks should ensure that the advance
does not become an NPA by proper follow-up and supervision to
ensure both assets creation and assets utilization and waiting for the
mandatory period before classifying an assets as NPA, the banker
should look for early warning signals of NPA.
 4. Personal visit and face to face discussion with a case of wilful default,
during discussion with borrower the banker may come to know details
relating to break down in plant and machinery, labour strike, change in
management, death of a key person, reconstitution of the firm etc. All
these factors have a bearing on the functioning of the unit and on its
financial status.
5. ‘Special Mention’ category of account, based on warning signals
obtained through both internal and external monitoring, bank may
classify accounts with irregularities persisting for more than 30 days
under ‘Special Mention’ or potential NPA category. Which is help for the
bank to proactive cause for early regularisation. The measures include
timely release of additional funds to borrowers with temporary liquidity
problem and restructuring of accounts of sincere and honest borrowers
after considering cases on merit.
6. Classification of assets is yearly exercise bank would do well to have a
system of on going classification of assets and quarterly provision. This
helps in assessing provisioning requirements well in advance. All doubts
regarding classification should be settled internally and a system of
fixing accountability for failure to comply with the regulatory guidelines
should be introduced.
7. Provision for doubtful assets is with reference to secured and unsecured
portion. Cent percent provision need to be made for the unsecured
portion. If banks can ensure that the loan outstanding is fully secured by
realisable security, the quantum of provision to be made would be less.
It takes one year for sub-standard assets to slip into doubtful category.
Therefore, as soon as an account is classified as sub standard , than one
year become classified as doubtful.
Reducing NPAs

Now a days, recovery is risk of credit on banks. It is also known as credit risk. A bank
credit risk has two distinct faces, ‘quality of risk’ and ‘quantity of risk’. it is observed that
the recovery is carried out in the banks by adopting following ways-

 General Mechanism
All the banks operated general mechanism of recovery of NPA, means all primary
measures to persuade the defaulting borrowers to repay their over dues like writing
letters and sending representatives of the banks to the borrowers for personal visits,
cash recovery, up gradation of assets

Cash recovery – bank instead of organizing a recovery drive based on overdues, must
short list those accounts, the recovery of which would provide impetus to the system in
reducing the pressure on profitability by reduced provisioning burden. The recovery of
critical amount (over due interest and installment). Means not making repayment of
interest along with the installment of principal amount.
Up gradation of assets – once accounts become NPA, than bankers should take steps to
up grade them by recovering the entire overdue. Close follow-up will generally ensure
success .

Legal Mechanism

In case of legal mechanism it is observed that all the banks operated this mechanism to
the maximum extent involving Debt Recovery Tribunals (DRT), Lok Adalat, Securitization
Act, and Compromises (OTS), Write off.

The Non performing assets is a very important aspect of every banking sector. However
Government should take positive steps forward on the below points to strengthening
the recovery & stopping the account slipping into NPA.

i) Management of NPAs in bank is poor,

ii) Many factors are causing the problem and low response to compromise proposals. Its
effects on business cycle, business cycle increases the possibility of credit loss, leading to
higher interest provision requirement.

iii) The last few years assets quality is challenged in banking sector on account of
slowdown economic, uncertain clement, political interference.

Overall conclusion for four mantra used to reduce NPAs of banks first is curtailing

bank’s costs, second expanding bank’s good quality assets, third is development to
bank’s employee skills and fourth is reduction in NPA.

Hope this will help…Cheers..

Before going into the crux of it, let us understand how major NPA problems began in
India after 2008.

Background:-

Back in 2006–07 Indian markets (specifically Infrastructure) flourished. Steel and many
other companies related to infrastructure borrowed huge amount of money from Public
Sector banks to expand their business and be a part of growth story. Then with arrival of
2008 financial crisis, India managed to escape because the government managed to self
fund most of the infra projects. Somewhere around in 2011 the government’s vault got
empty and thus infra projects and payments of certain companies were stopped. Hence
companies were unable to pay interest and principal to their respective banks which
inturn left the banking sector bleeding.

When Does a Bank declare NPA?

NPA stands for NON PERFORMING ASSETS. A bank generally declares an asset non
performing when its client fails to pay due amount within 90 days (180 days incase of
Agri sector or rather 2 crop season).

Steps taken by the government to solve NPA’s:-

There are various steps taken by both government and RBI to solve NPA crisis. Few steps
are as follows:-

1. CDR (Corporate Debt Restructuring) - Now supposingly a company

has taken a loan for 10 years at 10% ROI. If the company fails to return,
the bank in this case can give company time till 20 years with 7% ROI. In
this case both the tenure and ROI can be negotiated by both the
entities.
2. SDR (Systematic Debt Restructuring) - Suppose Company A took a
loan for 10 years at 10% ROI and if it fails to return, the bank in this case
can acquire shares/Equity of the company to recover its loan amount.
3. 5:25 Scheme - Suppose Company A took a loan for 25 years and if it
fails to return, the bank in this case can break the tenure to 5 year each
and can negotiate the ROI after every 5 years.
4. S4A- (Scheme for Sustainable Structuring of Stressed Assets)
- Suppose Company A took a loan of 100 rupees and if it fails to return
then the bank can negotiate tenure and interest for half the amount
(50rs in this case) and can acquire shares of the other half. In other
terms it is a mixture of both CDR and SDR mentioned above.
5. D-SIB (Domestic Systemic Important Bank) - One of the point
discussed in the Basel Norm was to maintain capital adequacy in those
banks that the RBI feels can endanger the economy if the bank is shut
or face any crisis. Hence as on today there are 3 such banks namely SBI,
ICICI and HDFC. RBI has to ensure that these banks should have enough
cash to handle/sustain any crisis.
6. SMA (Special Mention Account) - RBI has directed banks to mention
all the defaulters on regular basis. Under this method, the banks should
not sit idle for period of 90 days to declare an asset NPA rather it should
follow up, make a visit, converse with higher officials, raise an alams if
something’s fishy etc before declaring an asset a NPA.
Few other schemes are SARFAESI ACT, INDRADHANUSH (1.0), INDRADHANUSH
(2.0), DRT (Debt Recovery Tribunal), formation of Bad Banks also called as PARA
(Public Sector Asset Reconstruction Agency), NCLT (National Company Law
Tribunal), Insolvency and Bankruptancy code etc.

I personally feel that NPA crisis can be solved in India by encouraging the debt
market. In US and other european and asian countries debt market is highly valued. Just
a small example of debt market- Supposingly Tata’s require a loan of 1000cr. Rather than
going to the bank they can enter the debt market with their requirement of money and
tenure and bids can be initiated herewith. Instead of involving banks companies itself
can loan and help eachother.

Hope this helps. Stay Safe.

Major reasons for huge NPAs of the Public Sector Banks(PSBs):-

1. The Stressed sectors (for ex. Steel, Coal, Oil, Power, Telecom, Mining) require huge
capital for working, but the Private Lenders don't want to give them any loan because
they know there is a huge risk involved in these sectors. If these sectors don't get
adequate capital, they will cease to work and there will be huge pressure on economy.
So to keep them running, PSBs are forced by the Government to do the funding.

2. These sector are under the influence of global, political and other economic situations.

3. There are no rules to get funding of these sectors from Private sector banks. They are
at their own will to give funding to whom they want. They do not want to contribute
anything in economy. They just wanna do business.

4. PSBs are helping the economy by funding these heavily stressed sectors, which is
proving fatal for themselves. But there is no reward or appreciation from the
Government.

5. Whichever sectors suffers loss, victim is only the PSBs.

6. Whenever the loan gets NPA, there is no support from the Corporate Sector. They are
not willing to give the actual price of the asset. They want it at a much lower price than
its value. So the actual amount of the loan is not recovered. Even the promoters of the
company which went NPA, were allowed to participate in the bidding process.

7. The lethargic attitude of top management of PSBs is creating lot of trouble. They are
destroying public money like anything.

8. The Stressed sectors are not supported by the Government and rather they are left to
PSBs only.

9. The Agricultural loan waiver also is one of the reasons for huge NPAs of PSBs.

10. Various Govt obligations like MUDRA Yojana, Kisan Credit Card, Start-up / Stand-up
India, etc also pose a huge burden.

11. Influential persons like Vijay Mallya, Nirav Modi, Mehul Choksey, Lalit Modi, etc loans
due to negligence of PSBs.

12. Before the Insolvency Act came into force, the banks were even refinancing the
companies which were on the verge of getting NPAs to repay the loans.
What is the solution to solving the issue of non-performing
assets (NPA)?
There are three main approaches which can be used in tackling NPA of banks.

First the recovery efforts should be stepped up through regular follow up by bank
employees. The borrowers should be made aware of their obligations and legal
consequences of their non-payment of loan dues. Besides the loans should be need
based. It shouldn't be more or less in amount but appropriate to project cost.

If loan appraisal is defective the accounts may turn NPA even if the borrowers want to
repay. In case of natural calamity or business failure there should be proper restructuring
of advances allowing longer repayment periods.

In case of wilful defaulters, legal actions should be expedited without any delay.

These are some of the reasons through which NPA can be managed within
tolerance level.

Hello,

Govt. of India has taken lot of initiatives to have a check on the NPAs growing beyond
proportions.

1. Bank chiefs were hitherto been being selected by the Finance Ministry. It is well known
that the Bank heads are unduly influenced by the Law Makers. Present NDA Govt., has
approved the setting up of Bank Board Bureau on February 26, 2016. This is an
autonomous body of Union Government of India with a task to improve the governance
of Public Sector Banks, recommend selection of chiefs of PSU banks and financial
institutions and to help banks in developing strategies and capital raising plans. It should
be encouraged to have Bank Heads from other domains, not related to Banks, to have
out of box ideas in administration compared to those executives who come from within
the banks vertically. This already is being implemented I believe.

2. On 01/03/2018, the Govt., has taken certain steps. The Govt is coming up with "The
Fugitive Economic Offenders Bill" to address this high value NPAs. Once passed, the
legislation will give the government power to attach all the assets of a person who’s
been declared a fugitive and not just those acquired from the proceeds of criminal
activity. Cabinet okays Fugitive Economic Offenders Bill to avoid a Nirav Modi repeat

3. Wealth amassed in unscrupulous ways will not be kept in their names, Govt has come
up with “The Benami Transactions (Prohibition) Amendment Act 2016 was brought in
Nov 2016 which includes even cash deposits made in others accounts without sufficient
proof/explanation of its source. All you need to know about be aim transactions Bill

4. Inaddition to the above, the commencement of an independent "National Financial

Reporting Authority” - which would be an oversight body for auditors, is also in the
offing which, not surprisingly, is not favored by the Chartered accountants. It is well
known that they played havoc in scams like
“Satyam”. https://economictimes.indiatimes.com/industry/services/consultancy-/-audit/
national-financial-reporting-authority-to-be-formed-to-discipline-errant-auditors/
articleshow/63127775.cm

Following are my views to help recovery of Bank NPAs.

1. The above measures are for NPAs of above Rs.100 Crores. To address this, we may
make best use of technology to increase the speed of Recovery of NPAs. The moment an
account is declared as NPA, all the Company’s promoter directors and guarantors names
should be (unlike the present system of Bankers reporting to the Pass Port Office)
uploaded to the Pass Port issuing office server and Passports to be ceased forthwith.

2. Debt Recovery Tribunals are in place already for recovery of loan accounts with past
dues of Rs.1.00 Crore and above. But these Tribunals suffer from shortage of Staff
including appointment of Judges. The present 38 DRTs and 5 DRATs across the country
are not sufficient to clear the inflow of burgeoning cases and the number of Tribunals
should be increased. Unsettled cases with debt recovery tribunals on the rise: Economic
Survey

3. When a borrower fails to repay, at present all his deposits with that bank are set off
against the loan balance. Yes, all Banks enjoy this right called “Bankers’ General Lien and
Set off”. This may be extended to cover deposits of all banks across the country instead
of only within the bank. I don’t think any issues will crop up as the bank accounts are all
linked to Aadhar. Legal issues, if any, may be ironed out in consultation with legal
experts/bankers.

4. Now that almost all the accounts are EKYC complied, the moment a borrower is
declared as a defaulter by the bank, they should be enabled to access and update the
UIDAI server and when that borrower tries to open an account with a different bank it
should not permit. This should be extended in a phased manner to the borrower’s ration,
Health insurance, Utility services etc., which will put pressure on them as is prevalent in
developed countries. Technology can be used with lesser human interference for doing
these things which will improve transparency.

5. Incentives to Staff for recovery of NPAs, strengthening the existing mechanisms like
action under SARFAESI Act,, Consumer Forums, Arbitration and understanding the
genuine difficulties of Borrowers and considering OTS (One Time Settlements) should be
encouraged which will go a long way in creating a cordial environment for both the
parties- Borrower & Bank. The connivance of staff is already addressed.

6. Last but not the least, NPAs in Agri sector should be excluded from this procedure and
be dealt with in a separate manner.

NPAs in Banks per se, can’t be avoided and Banks have to live with them…this is but not
unnatural which Banks have to follow up for recovery. If one says prevention is better
than cure, I have to add, though I may not be competent enough to say, that our Banks'
assessment skills, if not world class, are not bad except for segments like Diamond
jewelry which requires expertise that bankers do not seem to possess, I believe. The
recent spurt of NPAs during February 2018, makes me to infer this.

To put it bluntly….Banks should be able to make the life 'miserable' for "scamsters" who
are spoiling the image of India across the globe, and they always outsmart the bankers.
Ultimately it boils down to one thing i.e. fundamentals of loaning…Selection of
Borrower.
Govt, judiciary too responsible
for India's NPA crisis: SBI's
Rajnish Kumar
https://www.business-standard.com/article/current-affairs/govt-judiciary-too-responsible-for-india-
s-npa-crisis-sbi-s-rajnish-kumar-118082000969_1.html

The Great Indian NPA Mess: UPA's sins

were of commission while NDA's errors are
of omission
the UPA may be blamed for a combination of political interference and infrastructure
adventurism. But NDA also deserves a share of the blame for the NPAs, although an arguably
smaller one.

Madhavan NarayananSeptember 18, 2018 10:20:59 IST

Editor's note: A political blame game is on after the recent revelations of former Reserve Bank of
India (RBI) governor Raghuram Rajan to a Parliamentary panel about the origin of the bank
NPA (non-performing assets) mess. About 90 percent of NPAs in India's banking sector is on the
books of state-run banks. Beginning today, Firstpost will publish a series of articles to analyse
the problem.

The ordinary Indian citizen may be forgiven for being confused about early this
month's exchange of charges between the ruling BJP and the Opposition Congress on the pile-up
of bad loans in the Indian banking system following former Reserve Bank of India (RBI)
governor Raghuram Rajan's statement for a Parliamentary committee examination into loans that
were either not returned or stopped yielding interest payments.
While there is definitely a strong case to suggest that it was during the Congress-led UPA 1 and 2
administration between 2004 and 2014 that there was politically blessed imprudent lending by
public sector banks that led to non-performing assets (NPAs) growing out of control, a patient
look would tell us that there is more to this.
The fact that Rajan also explained that NPAs need not necessarily come from big business and
that even small business loans (such as Prime Minister Narendra Modi's pet MUDRA loan
scheme) can go bad is a wake-up call for all about the culture of lending in the country.
The nationalisation of banks in 1969 and 1978 definitely ushered in an era of easier lending for
farmers, small businesses and housing but the flip side is that there has been a lack of prudence in
lending compounded by direct or indirect political interference --- be it in the "loan melas" for
farmers championed by the Congress in the 1980s or tales about bankers waving cheque books
with loan offers during the UPA era.

It must be remembered that all blame need not rest with the public sector. Given that even leading
private banks such as ICICI Bank and Axis Bank have faced NPA problems, we may put a fair
share of the criticism on what writer Salman Rushdie in a different context referred to as India's
'optimism disease'.

Former State Bank of India chairman Arundhati Bhattacharya, a highly respected figure, points
out to how the prolonged world financial crisis that squeezed economies worldwide following the
collapse of Lehman Brothers in 2008 also played a role in NPAs growing. You cannot blame
UPA for that, but you can certainly blame the overall culture of lending in which gambles became
gambits in the pursuit of high growth.
File image of Narendra Modi. PTI

Ms Bhattacharya says Indian bankers were smug in the face of safe deposits in India after the
world financial crisis and then goes on to observe that the "government launched a massive drive
to build infrastructure and India started its experiment with public-private partnerships (PPP) at a
large scale. There was also a sense of euphoria at having avoided the worst of the crisis. Both led
to rising business confidence and tremendous capacity expansion."

Some of the irrational exuberance stretches back to even before the 2008 global crisis. All told,
gross NPAs from infrastructure shot up from a manageable 4.66 percent of advances to the sector
at the end of March 2009 to 17.4 percent by the end of March 2013, when the amount was Rs
1.36 lakh crore.
The UPA can certainly blamed for throwing bank money at private infrastructure projects the
kind of which were earlier executed in the public sector. The fact that in both 2G telecom
spectrum and in coal linkages to power projects there were questionable allocations of public
resources to private parties only compounded the issue. Both policy-makers and bankers need to
be held accountable for linking lending easily to questionable cash flows.

Keen to grab headlines, Congress points to Rajan's bringing a fraud alert to Modi-led PMO in
2016 on which nothing was done. That is certainly a smart political trick but outright frauds are
only a small fraction of the overall NPAs. However, the Modi government can certainly be
questioned on the manner in which it dealt with the NPAs it inherited after taking charge in 2014.
The Congress says the current NPA levels of Rs 12 lakh crore are a multiple of the Rs 2.83 lakh
crore it inherited and blames it on 'Modinomics."

There are three counts on which the NDA government may be questioned or criticised on letting
the problem grow.
First, its romantic experiment with the demonetisation of high-value currency notes on 8
November 2016, has not only failed by most counts in recovering stashed black money, it also
hurt economic growth and the investment climate in the country.

Secondly, while the Modi government likes to pat itself on the back for bringing in the
Insolvency and Bankruptcy Code(IBC) to deal with NPAs, it may not have been the wisest
measure because the new framework basically passes the buck to a bureaucratic-cum-judicial
mechanism that makes the whole process of fixing bad loan problems excruciatingly slow --
although there is a time-bound framework. As Rajan points out, promoters have been filing
frivolous court appeals under the mechanism and the judicial system may not be best equipped to
deal with every bad loan. The fact that bad loans can go through three cumbersome layers --
insolvency professionals, the National Company Law Tribunal and courts --- makes it all
complicated.
Thirdly, there has been no significant reform within the banking system during the NPA rule,
which can be counted as another error of omission. Recent guidelines help an early red-flagging
of difficult loans but that is more preventive in nature than an overhaul. Once-bitten, twice-shy
bankers may lend carefully and also look for capital shore up their balance sheets but the overall
culture of banking in the public sector remains the same.
Rajan's statement makes it abundantly clear that the government could have done much, much
more by way of restructuring. For a government that claims to undo the sins of the Nehru-Gandhi
era, there certainly has been a missed opportunity during NDA's rule.

All told, the UPA may be blamed for a combination of political interference and infrastructure
adventurism. But NDA also deserves a share of the blame for the NPAs, although an arguably
smaller one.

(The author is an independent journalist. He tweets as @madversity)