Better loan recovery climate in the offing

Efforts to revive the country's stalled big infrastructure projects are likely to have good impact on banks Dr K Srinivasa Rao Banking sector is always under intense scrutiny of the stakeholders quarter after quarter. Though the performance of banks in terms of asset quality seems to have improved in the fourth quarter of FY-13, compared to earlier quarters of public sector banks (PSBs), the signs of stress in the quality of assets continue to be a cause of concern for the industry. The average gross NPAs are stated to be 3.2 per cent with outstanding amount estimated at Rs 1.8 trillion. In addition, the restructured assets are said to have reached Rs 2.2 trillion due to macroeconomic factors. Keeping the long-term asset quality perspectives in view, Reserve Bank of India (RBI) issued a new set of guidelines on the treatment of restructured loans. making them much more stringent. From April 1, 2015 onwards, RBI shall treat all restructured loans at par with NPAs, attracting prescribed provisions. In the meantime, new standard restructured loans are attracting five per cent provisions from June 1, 2013, a significant increase from 2.75 per cent earlier. The existing stock of restructured loans will attract a higher provision of 3.5 per cent, instead of 2.75 per cent. But when we compare the past NPA data, the gross NPAs of the banks were as high as 13.5 per cent way back in March 2000. The NPAs came down to 5.2 per cent in March 2005, 2 per cent in March 2010 before increasing again to 2.8 per cent in March 2012 and reaching around 4 per cent by December 2012. However, the NPA fell to 3.2 per cent now. Even if the assets under NPAs and restructured assets put together, the total may be hovering around 10 per cent, which are still less than the levels prevailing in March 2000. One of the critical reasons for recent surge in NPAs may also be due to continued 'easy go approach' of the entrepreneurs in servicing bank loans. The cost and consequences of non-servicing of bank loans are still far less compared to the cost and consequences of non-payment of other dues. Hence, in prioritizing the payments, the repayment of loans of banks in the minds of borrowers ranks last. If the fund flows are not enough to meet all exigencies, bank's turn do not come and the delinquency happens. Moreover, the entrepreneurs also draw comfort that they can refer the matter to the CDR cell seeking restructuring of loans on softer terms. The absence of systemic compulsion to repay bank loans is the main reason for increased default. The reasons for fall in sales, poor cash flows, rise in book debts, delay in receiving payment against supplies, extended collection period, etc., may also arise due to slow down in the economy and consequent exacerbated pain points in the business environment, but they may not necessarily be the reasons. Hence, the sudden surge in NPA levels can be partially attributable, among others to the current state of macroeconomic conditions and not wholly. But much depends on the systemic recovery climate and lack of adequate measures of more persuasion. But some of the recent measures may have good impact. The banks which have lent over Rs 2.2 lakh crore to big infrastructure projects that are waiting for various policy and regulatory clearances can now have some respite. All supportive actions are contemplated to fully implement these stalled projects. In coordination with banks and other interdependent agencies, policy initiatives are taken to revive the stalled projects. This will bring respite to banks that have partially disbursed loans and struck in the middle. A well laid structure to incentivize the prompt repaying borrowers and a social recognition of timely servicing of loans will go a long way in changing the mindset of beneficiaries. The bank borrowers need to realize that funds from the banking system has to be utilized for the purpose for which it is borrowed. Hence, its timely servicing and repayment helps other potential entrepreneurs to get funds in time that culminates in accelerating the growth of the economy. One of the basic features of bank lending is to step up productive activities of the economy and hence appropriate end use of funds is the responsibility of every borrower. The author is the General Manager in Bank of Baroda. The views expressed in the article are his own