NPA resolution must be done with a sense of urgency: Acharya

Newly-appointed Reserve Bank deputy governor Viral V Acharya on Tuesday called for some urgent steps to resolve NPAs, saying none of the "piece-by-piece approach" offered so far has worked, including the AQR, simply because of "the many discretions given to banks" as also their "skewed incentive system".

He also said even the December 2015 asset quality review (AQR) by the central bank has not helped resolve the issue, except in turning public attentions to the same.

Stating that timely resolution of NPAs is of essence if we were to restore corporate investment and create jobs, Acharya asked bankers to take NPA resolution "with a certain sense of urgency."

"I wish to speak today, with a certain sense of urgency, about the need and possible ways to decisively resolve our banks' stressed assets," he said in a speech 'Some ways to decisively resolve banks' stressed assets,' delivered at an IBA event here this evening.

The noted economist who joined the central bank only last month from New York University, noted that since asset quality review of December 2015, up to a sixth of public sector banks gross advances are stressed (NPAs, restructured or written-off), and a significant majority of these are in fact NPAs and for banks in the worst shape, the share of assets under stress has approached or exceeded 20 per cent.

This estimate of stressed assets has doubled from 2013 in terms of what had been recognised by banks.

Pointing out that the doubling of bad loans was not overnight, he said "there have been several hints - in the declining price-to-book ratios of bank equity, and in the many assets "parked" by banks under the CDR Cell were severely stressed. These assets were deserving of advance capital provisioning against future recognition as NPAs."

"Though the AQR has taken a massive stride forward in bringing the scale of the problem out in the open and stirring a public debate about it, relatively little has been achieved in resolving the underlying assets to which banks had lent," Acharya rued, adding similar was the fate of the several resolution mechanisms and frameworks offered by RBI as progress has been painfully slow.

He also traced the roots of the present problem to the breakneck lending during the heydays of 2009-12 period, when the economy was racing ahead, which left the companies laden with high levels of bank debt to such a level that their interest coverage ratio has fallen even below one with no capacity to raise funds for working capital and capex, and the original promoters' inclination to part no money but only sweat equity.

Acharya said, original promoters who rarely put in any financing and primarily provide sweat equity have had somewhat of a field day, facing limited dilution of their initial stakes nor much of a threat of being outright replaced.