Bankers expect NPA crisis to worsen in two-three years: E&Y

Rise in NPAs or stressed assets numbers due to diversion of funds to unrelated business or frauds

There won’t be any respite from bad loans in the banking system anytime soon, says a new EY survey. Bankers believe the quantum of non-performing assets (NPA) in the system will swell further in the coming years.

Seventy-two per cent of the respondents in the survey, which included bankers, said the NPA crisis in the country would worsen. “The stressed accounts that have been hidden till now would keep the NPA level rising at least for the next two-to-three years,” said the survey quoting bankers.

Eighty-seven per cent respondents said the rise in NPA numbers is due to diversion of funds to unrelated business or frauds. Sixty-four per cent of the respondents ascribed the reason for the rise in stressed assets to lapses in the initial borrower due diligence and 54 per cent believed the inefficiencies in the post-disbursement monitoring process has led to a rise in NPA.

According to the Financial Stability Report published by the Reserve Bank of India, the gross NPAs of banks as a percentage of gross advances increased to 4.6 per cent from 4.5 per cent between September 2014 and March 2015. In the same period, the overall stressed advances increased to 11.1 per cent of the total advances, up from 10.7 per cent.

“The reported numbers are quite high, and there are fresh additions every quarter, leading to further deterioration in asset quality. The portfolio of restructured accounts is adding to the problem at hand, thereby resulting in crisis,” said the report. The survey also stated that a majority of bankers believe the restructuring norms are being wrongly used. Seventy-two per cent of the respondents said the borrowers were misusing the NPA norms.

“Borrowers are taking advantage of the legal process. Even if there are no stressed accounts, they mis-utilise it to their advantage due to weak frameworks. We have not seen a single instance of borrower hiving off his investments for the success of the restructuring scheme. These schemes are often used to soften the pricing term, elongation of repayments, without improving on the basic viability of the business,” said the report.

REASONS FOR RISE IN NPA
How the numbers stack up

• 87% Diversion of funds to unrelated business or frauds
• 64% Increase in stressed assets due to lapses in the initial borrower due diligence
• 54% Inefficiencies in the post-disbursement monitoring process
• According to the Financial Stability Report published by the RBI, the gross NPAs of banks as a percentage of gross advances increased from 4.5% to 4.6% between September 2014 and March 2015
• In the same period, the overall stressed advances increased to 11.1% of the total advances, up from 10.7%

In order to check the rise in bad loans reported that 86% of the bankers polled said that existing monitoring procedures such as internal audits and concurrent audits alone were not enough to verify adequate functioning of the NPA mechanism and there was a need to strengthen internal processes and controls for early detection of issues.

Another 91% of the bankers said that forensic audits should be made compulsory and another 54% said that the audits will help in weeding out wilful defaulters as well.

"The Indian banking industry has been facing a challenging situation in the form of the NPA crisis. We have seen that an often overlooked, but integral aspect is lapses in integrity by the borrowers or by gaps in the initial sanctioning process undertaken by financial institutions," said Arpinder Singh, Partner and National Leader, Fraud Investigation & Dispute Services.