Are we on the right track for NPA resolution?
B. Yerram Raju*
In the last few years, barring the 2008 Recession and its global impact, no subject other than NPAs of the Indian Banks has occupied so much print space and media attention.
If good number of banks in the public sector has faltered in loan origination succumbing to external pressures, some others have failed to supervise their loan portfolio. But their contribution to NPA portfolio may not be more than 25 percent. NPAs that turn as bad loans are the real culprits. Only 20 percent of the total quantum of loans at the doorsteps of legal system could be resolved to the satisfaction of the banks, notwithstanding the projected empowerment of banks through the SARFAESI Act. The real reason is, therefore, beyond banks – the law and justice.
After a prolonged discussion on the credit risks that today’s banking system is loaded with, one of the well-meaning legal counsels has countered me with some loaded questions and these need attention.
- Advocate: You say that NPA is culmination of the credit risk likely to lead to an unrecoverable debt; so, the debt is recoverable with only a potential for non-recover. Am I right?
- I said – Yes;
- Advocate: What would you expect the bank to do?
- YR: Give a notice calling upon the creditor to pay up or else face the legal consequences?
- Advocate: Then what else?
- If the borrower does not turn up with a convincing response, what would you expect the bank to do?
- YR: Issue a legal notice:
- Advocate: then what?
- YR: If there is no response, proceed legally against the primary and collateral securities and guarantors?
- Advocate: What do you mean by proceeding against?
- YR: Ask the Bank’s legal advocate to file a suit?
- Put for sale the securities held by the bank armed with the provisions of the SARFAESI Act?
- Advocate: How much time it would take?
- YR: Three months! Not sure.
- Advocate: Then what do you do?
- YR: Sell it to Asset Reconstruction Company?
- Advocate: At what price?
- YR: 20-30 or sometimes even 40 percent discount?
- Advocate: So you agree that bank is prepared to lose its realizable value of the loan by this much percentage and the legal expenses?
- Advocate: Why should not bank offer at least a portion of this as offer of settlement and permit the borrower to sell the asset by himself up front without incurring legal expenses; without having to wait for three to six months and lose further interest?
- YR: Bank by this time would have lost trust in the borrower. The present rules also do not permit the banks to do so.
- Advocate: I am not asking of just the small and medium borrowers; what about large borrowers where the lenders and borrowers engage advocates to settle the NPAs that turned as bad loans.
- Advocate: How long the courts are likely to take?
- YR: Not sure; going by BIFR and DRT experience it may take anywhere between 6-20 years?
- Advocate: How much percentage of NPAs is settled through legal process during the last three years?
- YR: just around 20 percent including the SAFRAESI Act acquisitions.
- Advocate: So 80 percent will take another 6 to 20 years?
- YR: Think so.
- Advocate: Banks’ law firms to whom the cases are entrusted, in several cases of consequence, have no domain knowledge and keep on seeking adjournments.
- Advocate: But I understand that there is compromise and there is scope for arbitration. Why are banks averse to using this instrument?
- YR: Wilful defaulters and some bank officials can collude and create losses if such procedure is allowed to be a non-discretionary action.
- Even if it is discretionary action, it can still lead to motive-driven compromise, sharing the booty of bank loss as gain in their pockets?
- Then, naturally, CVC on their head!
- Advocate: Do you think all these processes have been able to wipe out your NPAs or bad debts?
- YR: No, Banks would have already provided for in their books of account as losses, leading to erosion of profits and also eating into capital.
- Advocate: So banks are not really interested in reducing NPAs as much as saving their own skin?
- YR: I should think so.
Advocate: Banks in several cases fail to do the due diligence of the entrepreneurs, enterprises and also do not go secure proper opinion on the documents of properties pledged. Several properties also have undisposed legal cases in different courts and several of them with the District Magistrate.
Law firms engaged by the banks sit in some metropolis and the banks’ legal officers do not equip themselves with knowledge of banking to brief the legal counsel firm appropriately. Adjournment of cases relating to financial irregularities should be no more than four and such adjournments should not be also for frivolous reasons like absence of the legal counsel on either side or the claimant. Reference to higher level of judiciary bodies also does not make sense when the default is established as per records as wilful. If it is found that banks have wrongfully classified an account as wilful default and did not provide opportunity to the respondent by arbitrary sanction of limits or misuse of discretion, bank should also be penalised and the account ordered for restoration without burden of interest for the period from which the account has been declared as NPA.
Banks need to use technology to be more transparent in their loan policies and information dissemination. One can understand the secrecy behind individual loan account details of firms and individuals. But there is no harm in disclosing the data on the number of enterprises/firms and the aggregate sanctions under certain thresholds state-wise and area-wise and sector-wise. Even the SLBCs or the other periodically released RBI data reveals such information. RBI Trend and Progress of Banking, BSR statistics are good for researchers and not useful for the informed public to gauge the trends of banks’ advances. Periodic information would contain explosions like the one we have been witnessing lately on NPAs.
The Government, banks, and the RBI to ponder over this dialogue made public with permission from my advocate friend. Credit risk becomes less important than covenant and legal risks once the account becomes NPA. Finally, it is not creating another Asset Company to hold bad assets but actual recovery of the amount that is important for the banks and economy. This recovery after the snapping point rests on judiciary. The economy on the growth path cannot afford the luxury of delayed decisions affecting the industrial development.
*This article has been published in the Business Adviser, Vol. XV (6) Dated 25th June, 2016.