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Mainstream, VOL 60 No 39-42 September 17 - October 8, 2022 - Bumper issue

Banks NPA Problem & NDA Government’s Loan Write-Offs | Pranjit Agarwala

Friday 16 September 2022


by Pranjit Agarwala

Recently the Union Minister of State for Finance Dr. Bhagwad Karad informed the Rajya Sabha that from 2017/18 to 2021/22 the NDA government had written-off a whopping Rs. 9,91,640 crores of bad bank loans. This is over four times what the UPA government wrote-off. The UPA government wrote-off Rs. 2,20,328 crores from 2004 to 2014. Apparently the NDA government has been indulging in a bad loans write-off spree. In banking parlance such loans are known as Non-Performing Assets (NPA).The NPA problem in India’s Rs.95 trillion banking sector did not materialize overnight. It evolved over a period of time.

The problem began soon after Bank nationalization in 1969. Irrespective of party affiliations, governments used nationalized banks (PSBs) to fund their populist agendas. However till the global financial crisis of 2008, private sector banks headed the Indian NPA charts. This may have been because of “deceptive accounting” which allowed PSBs to avoid classifying certain loans as NPA due to political interventions or to favor select corporate borrowers. Reportedly from 2011 to 2013 there was a rush to advance corporate loans often overlooking the borrower’s creditworthiness or asset quality. From September 2008 to September 2015 NPAs increased more than six times, from Rs. 53,917/= crores to Rs. 3,41,641 crores. Significantly by 2015 in the list of top ten banks with highest NPAs, eight were PSBs. Still there were no alarms, probably because the full extent of PSBs exposure was not reflected in the balance sheets.

In 2016 alarm bells went off when it was ascertained that NPAs constituted 90% of PSB loans putting the Indian banking sector in a serious crisis. Instead of dithering or indulging in a political blame-game, the NDA government directed the then RBI governor Raghuram Rajan to instruct banks to tackle the NPA problem upfront and clean up their balance sheets by 2017. This meant transparency in accounting. Mainly because of bad debt disclosures the PSBs gross NPAs rose from Rs. 2.79 lakh crores as on 31st March 2015 to Rs. 8.96 lalkh crores as on 31st March 2018.

A high ratio of NPAs in a bank’s balance-sheet affects its financial stability and ability to provide credit. A write-off is an accounting procedure which removes NPAs from a bank’s balance-sheets enabling auditors and regulators to correctly assess its financial position. By removing or writing-off NPAs from its balance sheets the bank’s financial stability improves. It also increases the bank’s capacity to lend as it releases capital funds from the Provisioning Coverage Ratio (PCR) account. However what are the implications of such massive write-offs for the ordinary citizens whose life time savings are deposited in the banks or the willful defaulters, many of whom are clout wielding corporations or influential businessmen?

Loans advanced by banks are covered by RBI’s PCR norms. According to PCR norms, while lending a bank must set aside capital funds to cover any loss that may occur if the loan becomes irrecoverable. For Indian banks the standard PCR is 5% to 20% determined by the borrower’s credit worthiness. For NPAs, depending on the collateral security, PCR is 50% or 100% as per Basel III norms. Hence in a loan of Rs. 1 lakh PCR is Rs.5000/- to Rs. 20,000/-. If it is classified as an NPA the amount will increase to Rs. 50,000/- or Rs.1,00,000/-. It is mandatory for banks to maintain the PCR funds to safeguard depositors’ interests.

A key economic bill of the NDA government is the Deposit Insurance & Credit Guarantee Corporation Act 1961 (Amendment) Bill 2021.The Bill came into force on 1st September 2021 and covers 98% of the country’s deposit accounts and 51% of deposit value. Under its provisions each depositor’s bank deposit is insured up to Rs. 5 lakhs. It also ensures that the depositors get their money up to the insured amount within 90 days even if the bank is under RBI moratorium. This has provided relief to depositors of several stressed banks like the Punjab & Maharasthra Cooperative Bank etc. Earlier the insurance cover was Rs. 1 lakh and it took nearly ten years for depositors to get the insured money and other claims.

A loan write-off should not be confused with loan-waiver. In case of a loan-waiver a borrower is absolved of repaying the debt. Nor can the bank take legal or any other action to recover the money. Moreover ownership papers of any collateral security offered to the bank must be returned to the borrower or the security freed from lien.

In contrast a loan write-off only removes the NPA from the balance sheets. The loan is not closed and the account remains open in the bank’s books. It does not free the borrower from the debt or obligation of repayment. The bank can take legal action through the courts or recover the loan through other lawful means. The bank has the right to confiscate any collateral security offered by the borrower till full repayment or alternatively auction off the collateral to recover the money. Further the enactment of the Insolvency & Bankruptcy Code 2016 with the objective of rehabilitating sick units within a set time frame has helped NPA resolution considerably.

According to Government and RBI data, from 2014/15 to 2021/22 Scheduled Commercial Banks have recovered Rs.8,60,369/= crores of written-off loans/NPAs. Of this the PSBs have recovered Rs. 6,42,000/= crores, filed suits against 98.5% and FIRs against 40% willful defaulters respectively. Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI) action has also been initiated against 75%. From 2016 to 2021 the Union Government has recapitalized PSBs with Rs. 3.36 lakh crores. PSB market capitalization has infused another Rs. 2.99 lakh crores. The PCR has thus improved from 46% in 2015 to 86.9% in 2022. NPAs are a part of banking which cannot be avoided. However it can be kept in check by strict RBI monitoring, transparent accounting practices, value driven credit culture and shunning crony capitalists.

(Author: Pranjit Agarwala is a free-lance writer & entrepreneur based in Guwahati)

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