Banks must take urgent measures to recover their non-performing assets

Unless the NPAs are recovered, banks would continue to suffer and finally, the burden would fall on the taxpayers.

The 24th Financial Stability Report (FSR) of the Reserve Bank of India (RBI) apprehended that the Gross NonPerforming Assets (GNPAs) of banks would climb from 6.9% in September 2021 to 8.1% in September 2022.

The 25th FSR report comes as a big relief because it pegs the gross NPAs of the Scheduled Commercial Banks (SCBs) at 5.9% as on March 2022. This is being applauded as the lowest during the past six years.

Yet, it is a matter of grave concern that the aggregate “Capital to Risk-weighted Assets Ratio (CRAR)”, a financial measure reflecting on the healthiness of banks, of 46 major banks is projected to decline to 15% compared to 16.5% in March 2022.

Menace of the Non-Performing Assets (NPAs) could be addressed in several interrelated ways. Banks must exercise due diligence to ensure that they lend to credit-worthy customers and that the loans are backed by adequate quality collateral to minimise delay or default risk.

Secondly, banks could make enhanced provisions for the bad and doubtful debt in their financial accounts and thus reduce their NPAs. This approach to managing bad and stressed assets seeks to save them from abrupt and sudden shocks of a large magnitude of their assets going phut. Thirdly, the banks may write off their bad assets and consider them as their loss. This approach too would adversely impinge on their profitability. However, by doing so, they get their balance sheets cleaned of the NPAs leading to improvement in their capital adequacy and thus enhancing their ability to lend more. Clearing the NPAs backlog is imminent to revive the banking industry and consequently the economy. However, cleanup is only the beginning of the process for the sustainability of the financial sector. Banks must take measures to recover their NPAs

It is to this effect, that several initiatives and legislative measures have been taken by the banks. Prominent among these include Lok Adalat (LAs), Debt Recovery Tribunals (DRTs) and Assets Reconstruction Corporations (ARCs) established. It is disquieting that these initiatives made encouraging strides initially. However, they seem to be proving effective only marginally.

Lok Adalats, for example, recovered 20.3% of NPAs in 2005-06 which gradually came down to 11.8 by 2011- 12. Since then, it has never been able to recover more than 6.4% and the latest data indicates that only 4% of the NPAs could be recovered by it in 2020-21.

So has been the case with the recoveries of NPAs through the Debt Recovery Tribunals. They recovered 76.9% of the NPAs in 2005-06 which picked up to 81.1% by 2008- 09. Since then their recovery trends have been fluctuating. So much so that it could recover no more than 3.6% in 2020-21.

Debt recovery by the Assets Reconstruction Companies had gone up from 8.9% in 2003-04 to 61% in 2007- 08. Thereafter the recoveries gradually declined to about 15% in 2018-19. Since then the recoveries have improved to touch 41% in 2020-21. The Insolvency and Bankruptcy Code (IBC) led debt recoveries were as high as 49.6% in 2017-1. It now stands at 20.2% in 2020-21. Taken as a whole, the overall debt recovery rates from all these four measures, which had peaked at 50.1% in 2007-08 have kept on sliding since then to reach a measly 14.1% in 2020-21.

NPAs have indeed been declining but it is largely due to larger provisions and writeoffs. This may undoubtedly improve the banks’ capital adequacy ratio and consequently enhance their capacity to lend further. It may, however, be noted that unless the NPAs are recovered, banks would continue to suffer and finally, the burden would fall on people, the taxpayers. The latest initiative to siphon off the big-ticket NPAs is the creation of the National Assets Reconstruction Corporation Limited (NARCL), popularly dubbed as the bad bank. The bad bank is intended to take over and recover NPAs worth Rs. 500 crore or more.

The bad bank, in the first stage, was supposed to take over a total of Rs 2 lakh crore of stressed assets of the commercial banks in a phased manner. For the first phase itself, 22 fully funded assets with a combined value of Rs 90,000 crore had been identified for takeover and consequent recovery.

Going by the initial trends, the bad bank has yet not been a roaring success. It has been able to acquire much fewer assets than planned, albeit at much lower prices to the comfort of the lending banks. It is also a matter of concern that it could recover only a fraction of the total lending. The bad bank mustn’t be allowed to end up becoming a repository of distressed assets. Because the Public Sector Banks (PSBs) themselves are the stakeholders in the NARCLs as well as their clients, there exists a strong possibility that they might offload their stressed assets to the bad bank to clean their balance sheet.

The bad bank is thus fraught with its hazards, unless, of course, the banks are deterred from the bad lending decisions. The bad bank in fact may aggravate the problem of NPAs by enabling the bad assets of the banks and thus enable them to lend more, which might amount to incentivising them to resort to riskier lending. Public Sector Banks (PSBs) are often branded as more proliferate both in creating bad assets and filing them to recover and realise them promptly. It is often concluded that they are less efficient in their lending decisions. The reality, however, is that there PSBs are often made to resort to such lending which they know is riskier.

The latest is the issues arising on account of educational loans. Such loans are proving riskier than the others. NPAs on the count of such loans are twice as high as the average lending. PSBs are now reluctant to sanction such loans but are being cajoled to do so by the government. Banking is a business and public sector banks must be allowed and empowered to take good business decisions without fear or favour.

Furqan Qamar, former Adviser for Education in the Planning Commission, is a Professor of Management at Jamia Millia Islamia, New Delhi. Arushi Mehta is a UGC-JRF pursuing PhD in the Department of Management Studies, Faculty of Management Studies in Jamia Millia Islamia, New Delhi.

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