Removing Cancerous Tumour of Non-Performing Assets (NPAs) out of our Banking System

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REMOVING CANCEROUS TUMOUR OF NON PERFORMING ASSETS (NPAs) OUT OF BANKING SYSTEM

S. RamaChandran

Comments by AllBankingSolutions.com :

We give below a letter sent by Mr. S Ramachandran, former General Manager at Bank of Baroda. The letter raises certain pertinent points around the current NPA situation, and also questions the logic of creating another ARC to solve the current NPA crisis. We are uploading the full letter as sent by him to Ms. Anjuly Chib Duggal, Secretary, Departmental of Financial Services. Readers should also add more points which they are aware so that this current situation be analyzed effectively, and not brushed under the carpet. We feel all our readers will share this article to help spread this message. Also, an old article from November 2014 touches upon today's situation and talks about Why setting up a separate NAMC is a bad idea?

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Letter Transcript

Subject: RE: REMOVING CANCEROUS TUMOUR OF NON PERFORMING ASSETS OUT OF BANKING SYSTEM

MS ANJULY CHIB DUGGAL,
SECRETARY, DEPARTMENT OF FINANCIAL SERVICES,
MINISTRY OF FINANCE,
NEW DELHI.
5th FEB,2016

MADAM,

As per my knowledge your ministry is discussing this matter since April last though the NPA classification has started as early as 1992, when Shri. M. Narsimham committee pointed out that banks' performance since nationalisation of banks in 1969 till 1991 was judged based on opening of bank branches in unbanked areas, lending to priority sector and profit was never talked about till then. I and this gentleman said when Indian economy is associated with world economy, Indian banks' performance should be judged on the basis of real profit and not book profit and he recommended income recognition norms and to identify NPA and start making provision out of profit . As such, though more than 23 years have elapsed since introduction, still it is a matter of shame that we are discussing this issue of removing of the NPA from the banks balance sheets by 31-3-2017.

According to RBI, the total stressed assets are to the tune of about Rs. 8 Lac crores and for making total provision on these stressed assets, the PSU banks profit is not at all sufficient. To maintain capital adequacy norms as required by BASEL Committee, Govt. will have to pump in more funds by way of capital. So, with a view to resolve the issue, and to enable banks to service the growing needs of the economy, the RBI has taken following steps:

1. Transfer the stressed assets which are not easily recoverable to ASSET RECONSTRUCTION CO (ARC). The ARC acquires bad loans from the banks and financial institutions, usually at a discount and works them through variety of measures, including sale of assets or a turnaround steered by professional management. Though during the last one and half years RBI has taken some tough action still bank NPAs continue to be the "white elephant" in the cupboards .Too little has happened all this while to pull the elephant out"

2. RBI tightened the corporate debt restructuring mechanism

3. Set up a joint lenders forum.

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4. Prodding banks to disclose the real picture of bad loans.

5. Asking them to increase provisioning for stressed assets.

6. Introduced a 5/25 scheme where the loans are to be amortised over 25 years with refinancing option after every five years

7. Empowering them to take majority control in defaulting companies under the Strategic Debt Restructuring (SDR) Scheme.

With the above steps, the RBI hopes banks would be able to clean up their balance sheets by MARCH,2017. But banks want more time to achieve this objective. It may be worthwhile to note that there are already more than a dozen private ARCS already registered under the SARFAESI ACT and they have achieved little. The 15 ARCS have combined net worth of Rs. 4000 Crores and as on 31-3-2015 and they have managed to resolve less than a third of the assets acquired.

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All the above clearly shows how banks have recklessly lend the money to dishonest borrowers/promoters with political connections to unviable projects without proper technical, financial OR economic assessment of the credit proposal. And for this, the dishonest/corrupt executives including the ED & CMDs of PSU banks were responsible, and no action has been initiated against them for such wrong doing and now the Govt. and RBI are trying to find out ways to resolve the problem. Further, it is also the experience of the general public that no banks want to go after rich and well connected wrong-doer, and they go after small borrowers who have suffered on account of reasons beyond their control.

Govt is also thinking of establishing for STATE-OWNED Asset Reconstruction Company with GOVT and RBI contribution, to resolve the issue of NPA i.e., removing the cancerous growth of bad assets ,which according to me is not a good idea as we will be investing good money after a bad assets/irrecoverable assets. In other words, we are shifting the bad debts from the banks balance sheets to the proposed state owned asset reconstruction co. Also, after doing this exercise, what is the guarantee that in future banks will not again lend to such undeserving/corrupt borrowers ?

I therefore request you to study this matter very carefully and then take the decision of starting state owned ARC to transfer the bad loans of the PSU banks.

WITH KIND REGARDS,

S. RAMACHANDRAN
Former GM BOB, CHAIRMAN & CEO OF SANGLI BANK LTD (NOW TAKEN OVER BY ICICI BANK)
SOCIAL WORKER

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