NPA in Banks - India

NPA resolution in India –  The way forward

The image of the Indian Economy has taken a beating in the recent past after  developments in the area of Bank Management, Bank Governance and NPA management. There is news, every day ,about new developments in the NPA management. The regular inflow of news on NPA has created an impression that our banking system is in a very bad shape.

The situation is not alarming, as it is made out to be. India has got one of the highest reserve requirements in the world and banks have to invest significant part of their deposits in the Government and safe securities.

The entire amount reported as NPA, is not a total loss for the banks. If diligent and well thought out strategies are adopted, then , it would be possible to recover more than 60% of the NPAs.  All the Public Sector Banks in India have many undervalued assets in the form of Real estate in Prime locations in India.

Further, the investments they have in Shares of public listed companies , will have a much higher market value than the value reported in Books. Many of these banks, have subsidiaries engaged in the business of  Insurance, Housing Finance , Securities Management ,etc. The value of these investments would be much higher than what is reported in the books of accounts.

Indian Economy is still very strong growing at more than 7% p.a . The savings rate of 30% alone is $ 750 bn , a very large amount considering the banking system. Further , the banking system has only about 12% of the total assets of the economy. In all these years, about 88% of savings was invested in immovable assets including gold, real estate and others. The value of these assets are very high. Auto sector, which contributes to 10% of the manufacturing in India, continues to grow at more than 10% and many sectors in India are still growing at more than 10% p.a , one of the highest in the world.

Considering all these factors, the investors need not press the panic button and say , all that has come to an end. In fact, this is the right opportunity for genuine investors to draw plans for aggressive growth of their businesses.

Many new initiatives were taken by the government in the recent past to resolve the NPA issue. The recent decision to allow companies referred to NPA resolution to even consider the option of selling the company as a going concern will go a long way in expediting the process.  The following further options could be considered apart from using the present / legal frame work to resolve the NPA issues.

Even, this week, government has allowed banks to set off the losses on account of treasury operations of banks over four quarters instead of a single quarter. The implementation of Ind – AS has been postponed. In cases, where the resolution process has started, banks have to provide only 50% of the value for NPA for accounting purpose.

For Industries /Companies affected by Policy issues. Government can set up a working group for each Industry to prepare action plans to make the industry competitive again. The action plans could address ,  change in the legislation; policy ; licensing; pricing and competition issues. The groups set up could come up with suggestions within a month and the action plans could be implemented within a time frame of three months. Wherever legal provisions have to be changed, ordinance could be passed.

1. In the case, where, the companies have mismatch of cash flows and for technical purposes, they are reported as NPAs, the provisions could be reviewed and they could be amended to revise the accounting norms. If a unit is able to prove that it would be possible to repay the instalment within six months of the due date, if it is a NPA, as per technical approach, the account could be excluded from addition to NPAs.
2.  The primary objective of NPA resolution process is to recover NPAs. As and when the units are referred to authority, in many cases, if there is a company ready to settle the full amount, the recovery could be made and the resolution process could be terminated. Detailed due diligence process could be done away with.
3. In cases, where , the promoters have the ability to repay and they have enough assets to repay, with the help of investigation and the compliance agencies, through a discussion with the promoter resolve and if the process does not work, then, the legal course of action could be pursued. Indians by nature, will be very conscious about the reputation in the society and when they are convinced by conciliatory approach to settle issues, many of them will come forward.
4. In every sector, even in sectors which are not doing well, there are best companies with good operating and financial performance. In cases, where the sickness is related to management issues, the companies could be taken over by Banks and the management contract could be given to these leading companies to improve the performance with a profit sharing approach. In these cases, the sick companies would be able to derive synergies from the best practice and economies of scale.
5. So far , the approach to resolution was focussed mainly on legal and financial aspects. A focus on strategic management to resolve the issues, change management would help in developing a competitive operation going forward.
6. Apart from addressing the distressed assets, Public sector banks have large real estate assets. Especially, the residences could be sold to generate cash. Many of the branches of PSUs have large space. Considering the technological developments, ideally, they would be requiring only 25 – 30% of the space , they occupy. The branches could be redesigned and the space could be optimally utilised. The extra space could be used to sell , other financial products, consumer loans with Durables and Automobiles, which can generate , lot of fee income. Banks can also sell other assets which are not core to the banking operations.
7. RBI. There has to be a continuous monitoring required. All the branches should send their weekly NPA reports to the Corporate office of Banks. Every bank, should send a consolidated report of NPAs to RBI , every month. In RBI, bank – wise, company – wise / Customer – wise / NPA details could be consolidated. Considering the advancements in Technology , it should not be very difficult to prepare these reports.
8. In RBI, A senior level officer , could be in charge of NPA monitoring and well staffed department to Monitor NPA could be set up in RBI. The consolidated reports generated by RBI could be shared with the Banks, Ministry of Finance,  Ministry of Corporate Affairs and SEBI. Based on the reports, from time to time, guidance could be sent to the banks. At a Bank level, a GM level person could be in charge of NPA monitoring. This department will be different from Special asset Resolution Department. The main role of the department is to identify and report NPA at regular intervals.
9. Legal process. In India, any procedure, which has to undergo legal process always takes time. In the light of this, the scope for resolving the NPA issue without legal process could be looked at as the first option. This will save time, money and uncertainty in the result of the process.

In addition to the present action plans by Government / RBI, implementation of some of the above action plans would help to reduce the NPA level and bring back the Banking system to black again. To achieve, there has to be a very good coordination between Government Stakeholders , all the related Regulators and  the banks.

( This is the opinion of the Author and not the Company he is working for ).

3rd Millennium – Opportunities, Issues and Challenges

3^rd Millennium – Opportunities, Issues and Challenges

R.Kannan , Hinduja Group

International Research Conference conducted by Indian Accounting Association, University of Mumbai and Chadrabhan  Sharma College on 7^th April 2018 .

Hon’ble Member of Parliament, Shri Dr. Kirit Somaiyaji, Prof.Shiware, Prof Chitra Natarajan, Prof. Ashok Joshi,  Prof. Madhu Nair, Prof Pratima Singh, Members of Indian Accounting Association, Faculty  Members and Researchers from all over the world , Ladies and Gentlemen, Good morning to all of you.

I am very happy to be part of the 4^th International Multi-Disciplinary Conference on Transition and the Transformation in 3^rd millennium.  I would like to thank Prof.Shiware and Prof.Chitra for inviting me to deliver the key note address.

I am happy to know that in this conference, research papers relating to:

i)                    Strategic Marketing and Planning

ii)                   Business Ethics

iii)                 CSR

iv)                 Global Management

v)                  HRM

vi)                 Digital Strategies

vii)               Innovation

viii)              Empowering Women

ix)                 Telecommunication, etc

Will be presented. It is very heartening to note that more than 400 research papers were received from various parts of the world and am happy to see , many dignitaries have come from abroad to attend this conference.

Am sure with these wide variety of subjects and perspectives, the participants including me will benefit a lot from the proceedings. The topic today is of utmost relevance in the context of continued disruptions and uncertainty in the Economy.

The advancements in the first 17 years of the 3rd  millennium are breath taking.  We are living in an age where continued disruption, uncertainty, volatility, complexity and ambiguity are part of our daily life. The advancement in recent past is much larger than the advancement witnessed in the earlier few thousand years in the past.

Few hundred years ago China and India were the leading economics in the world. According to some sources, both countries had more than 50% of the world’s GDP.

Later when Britain started expanding its operations globally, it became the leading economy in the world. Technology revolution catapulted USA to the leading position in the world. Afterwards, we witnessed the rise of Europe, Russia, Japan and South Korea.

From 1980 onwards, China started growing fast and India started reporting higher growth after liberalisation. Then we started hearing Acronyms like BRICS, MENA, CIVET, etc. In 1980 , China and India were of the same size  .  The breath taking reforms undertaken by China and the fast growth it was able to sustain for many years have made China , a global power today.

US and Europe and countries like Japan, Singapore and Hong Kong were contributing to the growth a few years ago. Even today, because of its large size, US contribution to the Incremental economic growth in the world is substantial. Since the growth potential in these countries have become less, the countries like China, India, Indonesia, Middle East and Arica have started growing fast.

According to predictions for 2050 by various experts, China will be the leading economy with a GDP of about $ 50 trillion, followed by US at $ 36 to 40 trn and India $ 27 to 30 trn. Indonesia will be the fourth largest economy in the world.

In the next 2/3 years, India will become the country with the maximum population in the world. It has the largest number of youth  in the world. The largest number of entrepreneurs in the world are living in India. We create  the maximum number of entrepreneurs in a year  in the world.

As per the forecast by all the leading financial institutions and Economists through out world, India will continue to grow at a rate of more than 7% p.a. for many more years. The high growth will create many opportunities for people from across the society. The path to the growth is paved with lot of challenges.

Indian society had gone through a fast transformation in the last few years. From total dependence on Agriculture and rural areas, the growth has shifted to services, manufacturing and cities. Despite, the level of urbanisation is only at 32%, what we find today is that lot of developments taking place in villages also. They are being provided with electricity, water, road connectivity, media and digital connectivity. The penetration of mobile phones in rural areas is taking information to every nook and corner of the country. The concept of joint family is giving way to nuclear families. In a family, many go to work, resulting in multiple income and high earning capacity. People have started spending money and India has become one of the high consumption economies in the world today.

The entry of e-commerce players has increased the consumption level.  Unlike in the past, today people spend lot of money on Education, Health , Leisure, Entertainment and Travel.

In an Economic Growth model, the growth of an economy is initially dominated by Agriculture and then manufacturing picks up. Finally, the services takes the dominant position. In the case of India, even without creating a big manufacturing base, the initial fast growth was supported by services. As the services grew, it gained its share from Agriculture in proportion to the lost share of  Agriculture. Whereas the share of industry and manufacturing remained at the same level for many years.

The fast growth in services was mainly supported by Trade. India has got one of the largest and deepest Retail systems in the world. There are six levels of trade before it reaches the final customer. At the retail level itself there are more than 15 million establishments. If we take the other six levels, it adds up to a lot in terms of number of entrepreneurs. This has created lot of business and entrepreneurial opportunities in India. Most of the jobs in India are created in the unorgainsed sector and too in the area of trade. At the global level, India becoming the leading country in the world for IT outsourcing , has created many businesses in the area of services. An entire eco system of businesses has been created around IT and ITES.

Whereas China’s growth strategy was anchored on manufacturing. With the low cost of all factors of production, China was able to become the manufacturing hub for the world. Now China wants to build its service sector and aspires to compete with India , in services.

If India has to grow at more than 7% p.a and the fast growth has to be sustained, manufacturing has to be developed. The share of manufacturing in our economy is only 16% and the Government has formulated a programme“Make in India” to increase the share of manufacturing share to 25% of GDP.  25 thrust sectors have been identified for increasing the share of manufacturing in GDP.

To achieve this objective lot of skills are required. When there is availability of lot of people for work, there  is also a big demand for specific skills to develop industries. Realising this need, Government has created a Skill development programme to fill the gaps in the skills required. Skill development programmes are in place at the National, Regional, Local levels and the target is to train 500mn people in the next few years  in more than  43 areas.

To develop manufacturing, a conducive eco system needs to be developed. To address this issue ,National level Industrial corridors spanning  across many  states and industrial corridors  within the  states were identified and in the process of implementation. These initiatives will help to develop the industrial clusters and infrastructure required for industrial development. This  will go a long way in accelerating the growth of manufacturing and  the economy.

Countries across the world have recognised the importance of fast economic growth. The ruling parties/rulers across the world , irrespective of the form of government ,  drawn up ambitious plans for the growth of their economies. They conduct road shows to attract investments into their countries.

Political climate across the world is becoming business friendly and the culture has changed. Earlier , investors used to visit the government offices to obtain permits. Now, the Government authorities , visit , various countries in the world and inviting the investors to invest.

In India every state Government has a plan to grow fast and each state conducts Road Shows/Investment meets to attract investments in the state. This will go a long way in increasing the competitiveness of states and formulation of  robust economic growth strategies.

Digitisation and Technology. The latest development in technology has created a lot of opportunities for growth but at the same time  has destroyed several industries. The fast penetration of mobile technology has advanced the social/financial inclusion and today even a person living in a rural area can use a smart phone to read and receive a high quality content which is of global standard. The advancements in AI, IOT, VR and block chain are going to improve the productivity several times.

At the same time, faster adoption of these technologies will destroy many jobs. Further , misuse of these technologies is threatening the privacy of individuals. The exploitation and profiteering is also a big threat. Cyber security has become one of the major areas of concern. The adoption of these technologies should be handled with great care and measured approach to adopting these technologies will ensure a balanced Economic Growth .

To ensure a balanced development of any industry and an economy, regulation and regulatory agencies play a major role. As the world becomes more and more complex, new regulations have to be formulated and new regulatory authorities have to be created. The time  taken and procedures to be adopted to adhere to regulations results in significant costs for an enterprise. Regulatory costs have become one of the major costs of doing business today.

The adoption of new technologies / manufacturing techniques has resulted in degradation of the environment. Higher level of manufacturing will result in higher pollution. Now that , we have set a higher target for manufacturing, there is always a dilemma, which one should be given precedence over the other.

The opportunities before us are accompanied by several challenges. Considering India has a large population, all our future economic strategies should be based on use of the available manpower. Considering the large number of work force, even a small improvement in productivity in India will lead to big gain. This is the moment for India. We have very good economic development programmes in India. By formulating workable implementation plans and effective implementation, India can regain the global leadership in the third millennium. To realise this dream, all the stake holders in the society should work together and Make India  a leading force in the world.

Thank you.