Thursday, February 7, 2013

NPAs loom large: spare the tax payer

During the recent meeting the Secretary, Financial Services had with the public sector bank chiefs anguished concern surfaced over the looming NPAs. As the owner of PSBs GOI is naturally upset since it has to refurbish the capital from its budgetary resources for the shortfall in capital. If the PSBs fail, it will be a sovereign risk. Can we look at the areas and causes for the rise in NPAs to the extent the RBI data has thrown up in its Report on Trend and Progress of Banking in India 2012?
PSB NPA data reveals that the actual amount of NPAs is equal at Rs.563bn for both the priority sector and non-priority sector credit dispensation. While accretion of further NPAs in priority sector is prevented by reducing the credit flow to such category, in respect of non-priority sectors, corporate debt restructuring has been liberally resorted to, to convert non-standard assets to standard assets. This is what made the regulator think of introducing 5% additional provisioning for the restructured assets classified as standard assets. That most Banks did not achieve the priority sector credit allocations stands in evidence for this reasoning. NPAs of 2012 compared to 2011 in agriculture moved up marginally by 0.2 percent while for the micro and small enterprises it declined from 17.6% to 14.9%. Correspondingly, the NPAs in non-priority sectors increased from 48.2% to 53.1%.
During the last ten years these banks moved to credit risk assessment of non-priority sector to technology platforms and due diligence of enterprises and directors is more by the data they have been able to secure and not by proper enquiry. Credit origination has gone more by macro analysis of the industry than by prudential micro analysis.
Public sector undertakings, real estate sector lending, infrastructure lending to airlines like the Kingfisher, roads and power sector take the blame. The origination process is through videoconferencing and group review of the credit parameters. Larger the credit faster it flowed. A more discerning analysis reveals that the export oriented manufacturing industries sharing approximately 8-10 percent of the credit to manufacturing sector are actually under the guaranteed mechanisms of ECGC and therefore, their migration from the standard to NPA would take more time than the normal. On the other hand, credit to the commercial real estate, tourism (tourist traffic increased during the last three years going by the increased occupancy in the star hotels), Hotels and restaurants, NBFCs are not impacted by the global economic forces. The asset value deterioration is more a result of faulty credit origination than global impacts to which recourse is invariably taken when accountability for rise in NPAs is sought. Fall in growth rate of the economy and inflation are the visitors to the rationale. Systemic risk and provisioning norms also join the blame game.
Despite introduction of risk management practices under the Basel regime, why the Banks are moving on the ascending graph of NPAs? This is because such risk management is viewed as the responsibility of CROs than of the risk assessers. It is the lack of proper risk appetite and risk culture across the organization that is responsible. Risk management is viewed more as regulatory compulsion than as an essential ingredient of their micro operations. Enterprise risk management is yet to sink in the banks. Learning processes in acquiring risk culture are also at very rudimentary stage. The officials feel overburdened with work on the system and seem to have no time for learning! A few of the corporate head offices earlier used to send periodical industry briefs to their officers. With the introduction of sectoral information flowing through the various networks and private researchers, banks’ CEOs expect that their officers should get better informed than ever on macro and micro prudential sectoral and industry appraisal. Somehow this seemed to have taken a backseat bowing to rigorous timelines for sanction more than for the rigour in monitoring credit flow.
Even if 50% of priority sector credit that constitutes 37-38 percent of the ANBC or off-balance sheet asset exposure this would be far less than the 50% of the balance credit portfolio. The concerns of the Ministry may be justified from this angle. But what is required for growth of the economy is the increase in credit to GDP ratio that is dependent on risk appetite. The other aspect requiring attention is the involvement of the Government in refurbishing capital whenever shortfall arises. As long as the CRAR is far above the required 9% is it necessary to refurbish the capital? Second, is it not prudent to shed some share in capital when the market is responding well to investments in banks than meeting out of the tax-payers’ money? It is time that the Government gives a re-look at the recommendations of Narasimham Committee I and II in this direction. Governance has scope to improve when this happens with a diversified Board taking more accountability.
*The author is an economist and Regional Director, Professional Risk Management Association, Hyderabad. Contact: