Short cuts won't work

Debt recast norms should not be relaxed

The timing of a letter written by the Indian Banks’ Association requesting the Reserve Bank of India (RBI) to relax debt restructuring guidelines is hardly surprising. The March deadline set by RBI to recognise all bad loans is fast approaching, but banks, especially in the public sector, are facing a growing mountain of non-performing loans (NPAs). The gross non-performing assets (GNPAs) of public sector banks have climbed to Rs 6.2 lakh crore at the end of December, an increase of 56 per cent over the previous year. The GNPAs of public sector banks (PSBs) are now pegged at a staggering 11.2 per cent of their advances and many believe this situation is likely to become worse. The trouble is, every time a bank classifies a loan as an NPA, it has to provide for this loss and the money for such provisioning comes out of its profits, which have been hit across the board since this process started over two years ago.

Instead, banks through the IBA have proposed a host of measures, including spreading provisioning of large accounts for eight quarters, or two financial years, and not seeking personal guarantees from existing promoters. A more spread out provisioning framework will allow banks to manage their books better. According to a Business Standard analysis of 23 PSBs, at the aggregate level, the solvency ratio – the ratio of a bank’s net NPAs to net worth – had risen to 63.1 per cent at the end of December, up from 60.9 per cent at the end of March. In other words, if banks were to provide for all these bad loans, it would wipe off 63 per cent of their net worth. At the end of September 2015, the ratio was 32.9 per cent. Making things worse is the fact that the interest income of the banks, too, has shown only marginal improvement. Banks also complain that many promoters are refusing to furnish personal guarantees for loan restructuring because they blame changes in policies and cancellations of mines and spectrum by courts for their debts becoming dubious in the first place. 

It is true that debt restructuring that makes a company sustainable is a good idea, but using it to kick the can down the road will obviously not help. The reason why further recognition of bad loans is becoming a headache for banks is that there has not been any real resolution to the already recognised NPAs. The amount recovered by banks from bad loans actually fell in 2015-16 to Rs 22,768 crore from Rs 30,792 crore in 2014-15. And the reason for tardy performance on NPA resolution is primarily that banks do not want to take haircuts, or at least not big enough haircuts, to move in the direction of resolving NPAs. There are too many apprehensions about what fate may befall a banker if he or she takes a decision in favour of accepting a big loss on the asset. RBI has tried several schemes but has failed to show results. The situation requires intervention by the government, as it is not only the biggest owner in PSBs but also their prime decision maker. One thing is certain: Looking the other way will only deepen the problem.