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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?
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.
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.
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
Disclaimer: [The articles written by author contains only the academic view of the writer and purely for discussions and updation of the knowledge of the bankers. The views expressed in the articles may not at all be subscribed by the organisation where the author is working and / or AllBankingSolutions.com]
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