NDA's major challenge: NPA, not UPA

The NDA government is in the month-long mirthful mood, celebrating the completion of three years in office. To some extent, it has delivered a taint-free government for a nation that had been painfully inured to the sorry spectacle of scam after scam tumbling out of the cupboards of the erstwhile UPA government that held office for more than a decade! Though comparisons could be odious between UPA and NDA, as the latter focused more on presenting a clean image even with an intimidating presence of a single leader at the helm in a democracy, the apparently tranquil landscape does not mean everything is hunky-dory. One cannot ignore most of the nation's problems including legacy ones and the new normal of promoting s personality cult.

Take, for instance, the oxygen for normal breathing in the economy, the credit available from formal channels including banks and its dispersal across the real sectors to keep the economy growing and glowing. In the absence of adequate credit at an affordable rate to stakeholders, the potential for growth and employment generation would be difficult to realise even if the administration is otherwise impeccable and free from rent-seeking leaders and bureaucrats. Unfortunately, NPAs have become an albatross around the neck of the economy, squeezing fresh flow of funds by its vice-like grip. This meant a pronounced slowdown in bank credit disbursal, hitting hard capacity creation through new venture or expansion of the extant enterprises.

It is a great testimony to the atrophy of fund flows from the banking channel that bank credit grew only 5.1 per cent during the year to March 2017, set against 10.3 per cent in 2015-16. The Financial Stability Report of the apex bank in December, 2016 did not mince words when it candidly noted that "a high and rising proportion of banks' delinquent loans, particularly those of PSBs and a consequent increase in provisioning for non-performing assets (NPAs) continued to weigh on credit growth reflecting their (banks') lower risk appetite and stressed financial position". Unsurprisingly, growth in loans and advances of PSBs drastically fell to 2.1 per cent in 2015-16 from 7.4 per cent in the year before.

The report reveals stressed assets (sum of gross NPAs and restructured assets) at 12.3 per cent of assets by end-September 2016. Discerning analysts cannot be faulted for making a wild surmise, even if unfounded, if this ratio would have further worsened by March 2017, following the November 8, 2016, midnight decision to demonetise high denominational notes and the subsequent virtual halt to economic activities for a few months in the ensuing melee.

In his term as the Governor of the Central bank, the erudite and globally acclaimed economist Dr Raghuram G. Rajan saw the writing on the wall of the growing NPAs of the public sector banks. He duly undertook an asset quality review (AQR) in December 2015 to grasp the nettlesome NPAs, even as his tenure ended before the assessment was complete on March 2017. Credit must go to Rajan for setting in motion the AQR process that has captured and recognised the vast majority of bank NPAs, even as cleaning up the mess demands concerted efforts from both the political masters and the banking regulator in harmony.

Rajan was alive to the fundamental canon that financial stability in an uncertain and turbulent financial world entails a sound banking system. He also knew that this could be predicated on robust global prudential standards combined with effective bank supervision. It is a loss to the Central bank that such a man with foresight could not get another term to ensure that the process he had set in motion would make the banking system a bulwark.

No doubt, the apex bank has put in place a spate of tools and templates for resolution of stressed assets that include Corporate Debt Restructuring (CDR), Strategic Debt Restructuring Scheme (SDR) and the Scheme for Sustainable Debt of Stressed Assets (S4A). Under the latter, an Overseeing Committee (OC) was set up to review the processes involved in the preparation of a resolution plan for reasonableness and adherence to provisions of the guidelines of the S4A scheme. RBI has also agreed that banks with the concurrence of OC might refer even other cases of resolution of stressed assets to OC that are outside the ambit of S4A. Finance Minister Arun Jaitley said in Parliament recently that actions have been taken to empower banks by statutory change with amendments to Debt Recovery Tribunals, SARFAESI and other relevant laws.

It needs to be noted that this year the Economic Survey alluded to the twin balance sheet problems plaguing the corporate and banking sector. The IMF too in its 2017 Article IV discussion issues mentioned that in India the link between the financial performance of the banking and corporate sector is strong. With the corporate sector accounting for about 40 per cent of the credit portfolio of banks, particularly PSBs, IMF said PSBs' soundness and their ability to provide effective intermediation in the economy rest on effective debt restructuring and deleveraging in the corporate sector. That is why the RBI has also carried out a review of its Prompt Corrective Action (PCA), 2002 framework recently as a precursor to resolution options.

The crux of PCA is the need to prevent banks from failing as the cost of failure of a bank is prohibitive and disruptive with systemic spinoffs and financial stability implications. The PCA 2002 framework was based on capital adequacy, asset quality and profitability more specifically to capital to risk asset ratio (CRAR), net non-performing advances (NNPA) and return on asset (ROA). Following a review of the 2002 framework by an internal working group, the Revised-PCA is now in place effective from April 1, 2017. This applies to all banks in the country including small banks and foreign banks operating through branches or subsidiaries. Besides spelling out in greater details R-PCA indicators, the Central bank will also wield its discretionary corrective actions that cover restrictions on branch expansion plans, business at overseas branches, entering into new lines of business and non-credit asset creation.

With enough firepower in its armoury to attack the NPAs head-on, complemented by the recent Ordinance that empowers it to set up oversight panels to study loan recast, the banking regulator, without being a bully to the banks or the borrowers (corporate), can go about seeking resolution of impaired assets. The Insolvency and Bankruptcy Code (IBC) 2016 might chip in to help in this stolid task. All eyes are now on the June 12 meeting convened by Jaitley with top banks honchos to review the steps being taken by them to expedite recovery of bad loans. The Finance Ministry and the RBI need to tread cautiously on this issue. What is at stake is the complete cleaning of the mess in India's banking sector. The economy needs the smooth and affordable flow of credit to productive segments that would propel growth and employment. IPA