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 ).