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: yerramr@gmail.com
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