Tuesday, April 17, 2012

RBI Governor also expresses concern on Rising NPA

RBI asks banks to set up process to identify NPAs
18 APR, 2012, 04.17AM IST, ET BUREAU 

MUMBAI: The Reserve Bank of India has asked banks to install a robust mechanism to identify stressed accounts and promptly restructure viable cases to preserve the economic value.

The central bank has also mandated banks to have a proper system-generated segment-wise data on their NPA accounts, write-offs, compromise settlements, recovery and restructured accounts. The move comes after the central bank said in its annual financial inspection in March that restructuring facilities are not extended to small accounts.

Corporate loan accounts that needed to be restructured hit a nine-year high of 50,250.22 crore in 2011-12 with the corporate debt restructuring (CDR) cell.

Rising interest rates and the increasing debt burden have affected the repayment capacity of companies forcing RBI to review the NPA management mechanism in banks.

The central bank is expected to issue detailed guidelines separately. In January, the central bank constituted a working group to review guidelines on restructured advances. The report is expected to submit its recommendations by end of July.

"CDR has increased very significantly. It does represent a stress in the system. But, at the same time, the evidence shows that the accounts have been restructured and have remained standard after restructuring.

Out of this, the slippage is not more than 15% and even after taking an outer limit of 20%, 80% of the restructured assets are proved to be good assets," said Anand Sinha, deputy governor, RBI. "But, if the account is under stress you only have two options: either call back the advance, which is not correct if the account is viable, or if it is not, you have to restructure it. So, rescheduling should not be seen with negativity," said Sinha. RBI's working group has had three meetings so far.

"The issues discussed revolve around the sacrifice banks have to make in a restructuring. Members of the committee are taking into account the international best practice,'' said a banker.

Non Performing Assets in Public Sector Banks


It is only medium class borrower, middle class people and medium management officials in bank who are sufferers and who have to bear the brunt of bad policies, bad intentions of top officials, bad politicians and the bad systems of the country. On price front too, it prices rise it does not affect rich or poor class, it badly hits middle class dwellers only.

As usual, bankers have raised the issue of interest rate hike before RBI Governor and requested for a pause or stop on interest rate which have been hiked many times during last 15 months. Bankers have pleaded that high interest rate will adversely affect loan growth and also increase the amount of bad loan. 

I have been advocating for last three four years that uniform rate of interest for deposits and advances should be decided by RBI keeping in view national and international situation and the same should be followed by all banks so that banks do not compete each other on the issue of interest rate and customers do not get the opportunity to adopt frequent change of bank for availing cheap loan and in turn adversely affecting the quality and quantity of loan portfolio of banks.

But I do not agree that hike in interest rate may affect overall loan growth. Loan portfolio of one bank may grow at the cost of that of others. 

Good customers seldom care for interest rate whereas bad customers may cheat the bank even if the rate is too low. Interest cost in any company's balance sheet constitutes negligible portion in their overall burden of expenses. 

As such a lit bit rise from present level may not have that much affect as non rise of interest may affect the inflation pain on entire economy .


Of course it is desirable that interest rate is kept as minimum as possible as possible and hence I always plead that RBI should fix uniform interest rate for different sectors and for different time period for overall sound health of national economy. Unnecessary and unwarranted rate war among bankers cause loss to one bank or the other and it is ultimately the government and the people of India who have to suffer.


Further I do not accept the logic of bankers that rate hike may jeopardize their loan portfolio and as a consequence of interest rate hike instances of bad assets will increase. It is bitter truth that bad assets which have been surfacing now are not creation of interest hike but the creation of the period when low interest rate regime was prevalent. Bad assets have been concealed by clever bankers and it has been in practice for last several years and now when banks are forced by RBI to ascertain amount of Non Performing Assets or bad assets strictly as per system they are constrained to declare their entire accumulated NPA latest by 31st March 2010.


It is beyond doubt to me that all newly surfaced NPA are creation of period when low interest rates were charged to customers. In my view, amount of bad assets has been growing consistently in government banks largely and mainly due to prevalent corrupt practices, due to ill motivated decision on lending taken by corrupt executives of the banks and due to inaction of corrupt officials.

Here it is worthwhile to mention that Micro Finance Institutes in various states are lending at rate ranging from 25 % to 40% to small traders, weak  farmers, street vendors, and other socially backward class for various purposes. It is government banks who extend bulk money to these MFIs at low rate of interest for onward lending at higher rate of interest. These bankers without any hesitation justify lending by these MFIs at high interest rate and at the same time advocate for low rate regime .They do not foresee rise in bad debts when MFI resort to lending at high rate but fear their loan going bad if RBI do not pause hike in rate.

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Who will punish corrupt bankers

Housing scam which surfaced yesterday and which resulted in arrest of eight high rank bank officials are only tip of the iceberg. Corrupt officers are sitting on top post of each bank and hence they ensure promotion to only those who are expert in the art of earning money and who is number one corrupt. Interview panel in each promotion process gives the scope to pick and choose yesman for branches where some money can be earned.
I would like to request RBI , Government of India, Ministry of Finance and particularly to all responsible officials to prepare a list of NPA borrowers in various segment of amount involved and try to know the person who sanctioned and who failed to monitor and also who supported indirectly from administrative offices .Officials who are corrupt and who sits in controlling offices manage bad advances through Branches and contribute in generation of more and more bad assets known as Non Performing Assets (NPA).

RBI can direct each bank to furnish such information and then RBI officials can make a study of such report to identify corrupt executives . Now a days such information can be generated through CBS without any loss of time and without any discomfort. Even controlling officer can generate such list if he or she so likes. Excel sheet can be prepared very easily on following columns.

1. NPA Account with value involved upto Rs.5.00 lacs (small borrowers)
2. NPA accounts with dues more than 5 lacs to o 50 lacs (medium size borrowers)
3. NPA accounts with dues more than Rs.50 lacs to Rs.5.00 crores (large borrowers)
4. NPA accounts with dues above Rs5.00 crores. (Very large borrowers)

Each segment should contain following columns so that it can precipitate and clear;ly reflect the name of bad bankers.

1. Name of borrowers
2. Date of sanction
3. Name of Branch head or credit sanctioning officer
4. Name of immediate controlling head called as regional head or circle head or zonal head

Then anyone can select through excel and filter data as per person on all India basis. It means bank should prepare a list of all bad borrowers which have been sanctioned by a top executive say ED, then General Manager, Deputy General Manager and so on up Regional Head and Branch Head. Such list should be prepared for each and every executive in the bank starting from top scale VII to scale I. The person who has created NPA in all branches and Regional Head who selected more and more corrupt branch Manager should be treated as bad bankers.

First make a list of big amount NPA borrowers created by regional head or circle head in India during last five years irrespective of his posting (sanctioned directly by him or through branch manager working under him)’

This will indicate the name of executives who created maximum NPA and prove that such officials are getting fastest promotion and all such people are sitting on top post and hence there is none to punish bad officers.

Such executives have very good relation with top bosses and also powerful persons sitting in RBI and banking division. This is why no action is taken against top officials and in all cases of misdeed junior officers are made scapegoat. Such officers if trapped accidently can manage tactfully even CBI or vigilance officials and ensure closure of files or at least ensure awarding of minimum punishment.

This is why there is dissatisfaction in the branches and administrative offices among junior officers in all banks under public sector. Bank officers are least bothered at field level whether NPA is increasing or profit is shrinking. Clever bankers are always expert in making lame excuses of global recession or bad monsoons or debt relief and so on.

Corrupt officers are quickly promoted and posted at good places in big towns whereas good officers who are serious workers are placed at bad places and in critical branches.

It is therefore dire need of the hour to find out and identify corrupt officers at top level and ensure that they are punished and without which one cannot imagine of NPA coming down in any bank. When top officers will be booked to task , clear cut message will reach upto the bottom level officers and only then juniors officers will desist from corrupt practices and top officers will not post and promote juniors on the basis of flattery or on the basis of golden and diamond gifts they get from juniors.

When bank management can publish the name of bad borrowers in Newspapers, Government of India or RBI or Banking Division in Ministry of Finance can also publish the list of bad bankers. At least thye can prepare a list of such bad executives whose advances invariably become bad and RBI can ensure their demotion forthwith.

Rather name of sanctioning officer and controlling regional head must be published along with the name of each bad borrower published in newspaper. When action can be initiated against borrowers to take possession of assets by banks, why not illegal assets of bad bankers also should be confiscated and sold off before public.

Only a healthy culture in bank can help in reducing NPA percentage and help in becoming top ranked performer bank.. Hitherto CEOs and EDs in banks are showing lesser percentage of NPA by increasing volume of fresh and short period advances or by selling NPAs to Arcs. Days are not far when this manipulative tactics will also fail to salvage banks. It is therefore necessary that actions are initiated before it is too late.

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