Wednesday, January 04, 2012

Story of Fall and Rise in NPA in Government Banks

Above chart shows the information published by Reserve Bank of India.

Era of economic reformation, privatization, liberalization and globalization started from 1991 after about two decades of exploitation by labour union under the banner of nationalization of banks and after having experience of almost two decades of labour exploitation before nationalization.

Exploitation of bank employee was at climax upto the time when Indira Gandhi nationalized prominent banks in India in 1969.Exploitation by management slowly came down and exploitation by workers slowly increased to go beyond control. Bank management was advised to serve neglected and priority sector and take part in poverty alleviation programmes launched by government to meet social obligation.

In the year 1991 ,Government followed the guidelines framed by USA and other developed countries to handover the banks to private sector . Mr. P. V. Narshimha Rao and Mr. Manmohan Singh together were suffering the pain of Trade deficit and that of Dollar crisis because India was not having adequate reserve of US currency to meet payment obligation arising out of even one week Import. Export was not growing in tune with Imports. Trade deficit went beyond control.

Government led by Narshimha and Manmohan Singh deregulated banks, process of issue of license for opening private banks was made easier, banks were freed to decide their own rate structure and individual bank managements of various banks were given maximum autonomy in lending.

Slowly norms of social banking were diluted and profit making was emphasized. Bankers discarded priority sector lending and focused on bulk lending to big corporate. Profit making became the sole target of government banks to compete with fast rising private banks. Class Banking became the slogan of government and social banking became irrelevant and insignificant. Bankers saw profit opportunities more in high value and bulk lending. Probability of loss was more visible in lending under priority and neglected sector.

Since banks were habituated to lend to earn bribe money and they were not having any control on recovery of loan, Non Performing assets went on rising. But they wanted to become number one among peer banks and book higher and higher profit. Top management gradually conveyed the message to all field functionaries not to declare bad assets in books of accounts. Officers who wanted to apply honestly prudential norms of RBI in classification of advances were transferred to critical places or posted in administrative offices to face the torture of bosses. 

In this way it became the culture in banks to hide and conceal bad assets to lessen provision and book more and profit. Branch head and Regional Head whose financial result exhibited less NPA and more growth in lending, good or bad were promoted year after year and given cream posting as happen in police department. Posting of an inspector in good police station where scope of bribe earning is huge is decided by his bosses on the basis of money he shares with bosses.

All freedom given to greedy bankers in the name of reformation started adding fuel to fire. Unfortunately, no change was brought about in legal system. Legal tools available for recovery of bad debts were too weak and to ineffective to help in recovery of dues form willful and recalcitrant defaulters. Non Performing assets though  concealed by clever bankers cause pain on balance sheet and huge money is spent on Charted Accountants to obtain their concurrence and to obtain their signature on quality and quantity of good and bad assets. This process of manipulation with books of accounts continued for almost two decades.

When quantum of bad assets rises, proportionate amount of provision has to be done as per RBI norms. The higher the provisioning the lesser will be the profit. Government under the banner of reformation wanted banks to earn more and more profit and share dividend with government. Therefore some of clever bankers started hiding bad assets to increase profit. Slowly it became a culture in all banks not to follow RBI norms for income recognition and classification of assets. This is why NPA ratio started coming down from 24.8% in 1994 and reached bottom to 2.2% in 2011. Clever bankers increased credit at the rate of 40 to 50% per year and concealed all bad assets which resulted in continuous fall in Gross NPA ratio of government banks.

It is not that legal system helped banks to recover money from defaulters. Even now cases filed against defaulters are not decided even in two or three decades in Indian courts, or Debt Recovery Tribunal. Corruption and unwillingness to act against defaulters continue to contribute in escalation of Non Performing Assets.

It is not true that bank officials became intelligent overnight during reformation era i.e. after 1991, Rather corrupt officers in banks in nexus with corrupt politicians want on lending to unscrupulous businessmen to earn more and more bribe and become more and wealthier. It is not a fact that officers in banks did good home work and honestly sanctioned loan to good borrowers which helped in reduction of NPA in Banks. It is not that bank officials worked hard to monitor bad advances to prevent rise in bad assets.

It is not that borrowers became honest; it is not that borrowers became religious and started following good morals, and it is not that borrowers became law conscious and afraid of legal action or punishment from judiciary that they started abiding by terms and conditions sincerely and honestly to become god customers in the era of banking reformation. It is not that borrowers started repaying all installments in time and repaying all loans on demand made by bankers. It is bitter truth that quantum of NPA has come down not because of improvement in quality of bankers and neither because of improvement in moral standard of loan takers.

Bitter truth is that banks adopted Core Banking Solution during last five years and slowly all banks and all branches have started functioning on CBS platform. Even after working under advanced technology the clever and shrewd bankers manipulated system and got succeeded in concealment of bad advances. For four or five years such dirty work of playing with system continued .

Last year only RBI advised all banks to declare bad assets strictly as per system and not to change it manually to hide Non Performing Assets from books of accounts. Again RBI gave some relaxation to save some prominent banks going bankrupt under the burden of sudden exposure of all bad assets. Sudden exposure of bitter truth of bad assets accumulated in a decade or two could have adversely affected the profitability and capital adequacy ratio of banks and have created irreparable damage to image of Indian banks in world forum .As such RBI and Government of India in nexus with top management of Public sector banks decided to declare hidden bad assets in phased manner.

This is why Volume and Ratio of Non Performing Assets in all government banks have doubled or trebled during last three years and it will go up I coming quarters. It is expected that total NPA in PSBs will reach upto two lac crores by the end of 2012 and gross NPA ratio may reach upto 5% .Now it is crystal clear that sudden rise in NPA in banks is not due to bad weather or global recession or inflation but it was manmade and it will continue to hurt good money of good depositors. 

Government will have to infuse capital from time to time to provide safety to Public sector banks and to enable them to survive and compete with private banks. Damage caused by corrupt bankers and corrupt politicians is so much deep rooted that it is difficult to dream of asset remaining good. Culture of bank officials has been spoilt by dirty politics of dirty politicians. Crisis in bank is inevitable and God only know when it will erupt and how it will be handled by wise and doctor Manmohan Singh and his government.

If government does not make judiciary strong and effective,
If politicians do not stop misusing banking fund for vote bank purpose and if they do not stop loan waiver culture,

if government as well as bank management do not discard policy of taking decision based on flattery and bribery,

if banks and Minister continue to have faith on officers who is clever in delivering lectures,

if Ministry of Finance continue to sell the post of ED and CMD and then CEO selling the post of GM,DGM etc ,
if unachievable credit target continue to be imposed on banks without ensuring adequate quality manpower,
if anti corruption agencies continue to work in nexus with corrupt officials ,
 if RBI do not give relaxation in prudential norms set for income recognition and classification of assets and
if Government stick to adopting Basle III norms ,

there will be no doubt in the minds of wise, honest, matured and experienced bank officials that movement of NPA in government banks will take reverse gear and resume its upward trend and with accelerated speed  cover the path of NPA ratio moving from 2.2% to 24.8% of total advances.

There is no doubt that the government will have to revisit the policy of reformation launched in the year 1991 and assess the gain and loss happened to banking industry by dint of unwarranted freedom given to banks in lending, in interest rate , in recruitment, transfers and promotions and so on.As a matter of fact human being are by dint of their creation not fit for absolute power. Power more often than not make one corrupt and tempt him or her to think more about self ,about wealth and about self ego and status than that of the organisation.


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