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Why NPAs have reared their ugly heads once more

Over each of the five trading days this week, the Nifty dropped on each, led by the Bank Nifty. This was due to the relentless news coming out on earnings front with respect to non-performing assets (NPAs) of public sector banks (PSBs).

Of the 10 PSBs that reported earnings, seven reported bad loans at over 5 percent of total loans while the strongest, Bank of Baroda , reported an 18 percent jump. NPA for the second-largest, Punjab National Bank , stood at 6 percent.

The picture for the smaller ones is scarier: UCO Bank  added Rs 2000 crore of bad loans, or 28 percent higher, in just 90 days while IOB’s  bad loans touched 8.2 percent.

Why this haemorrhage and how should we stop it? Why have bad loans taken a quantum leap in Q3? Why are borrowers failing to pay at such a fast clip? What kind of borrowers are defaulting? Does the banking system need some emergency external help to stem the tide?

CNBC-TV18’s Latha Venkatesh spoke with Diwakar Gupta, Ex-MD, State Bank of India  and SC Bansal, former CMD, Oriental Bank of Commerce , to get their views on this.

Below is the transcript of the interview on CNBC-TV18.

Q: What is your sense, why this quantum leap with more and more bank chairman telling us that 70 percent of their fresh NPLs are actually their restructured assets toppling, what is going wrong here?

Bansal: We must understand why these NPAs are coming up and coming up so sharply in the last 18-24 months. Let us go back into 2005-2006 when most of these infrastructure projects were conceived.

There was a particular IRR in mind depending upon the economic growth. We were growing at 8.5-9 percent. Unfortunately when we came in 2008-2009 when most of these projects were supposed to deliver there was a global meltdown and Indian economy started slowing down. So, the calculation of IRR went haywire plus interest rates started moving up.

In 2010 we migrated to base rate, it was 8 percent and it went up to 10.75 percent. At that stage in 2009-2010, we allowed a one-time restructuring – general restructuring – left, right and centre without going into the merits of the case.

As a result in 2011-2012 all of a sudden performance of these projects came up for testing. Slowly one by one, these assets started falling into NPA category because the IRR was not up to the mark and plus interest rate had already moved up from 8 percent to 10.75 percent. So, these two were major factors.

Secondly, agriculture debt waiver also impacted a lot. It vitiated the atmosphere of repayment and there was a negative impact.

Thirdly, our NPA resolution system is so bad that the public sector banks refrain from compromising because then there are so many questions. All these three things put together are adding up to NPAs.

Q: The system has Rs 6.5 lakh crore of restructured assets. Way back in 2011-2012-2013, when we were questioning the chairmen, they said how can you say all the restructured are NPLs? Barely 10 or 15 percent have become NPLs. Do you think now we are in danger of like 50 percent becoming NPLs?

Gupta: We need to understand that there was a downturn. There was restructuring which was done assuming that we were coming out that downturn. That coming out of the downturn has now been delayed by two years. We were talking this in 2013, we are in 2015.

Even today while the markets have run up on the basis of a positive sentiment, on the ground you don’t see much relief. In fact there are many who say it is actually marginally worse.

So, whatever you restructured in the hope that you would have revenues in 2014-2015 that has not been realised. It is but natural that these restructured assets would therefore become non-performing or continue to remain stressed. The question therefore is go beyond the litter and look at the spirit of the NPAs. I think that is the only resolution.

The governor in his bi-monthly review recently used that word, he said there should not be a stigma attached to NPAs. That is really the crux of the problem. Nobody is saying that you should evergreen it or call a substandard asset, standard. You should be willing to call it substandard but know that it is viable. Therefore you provide more and still continue to help the project. That is where there is not enough appetite for decision making.

Q: Should it be moral suasion or should it be capital? Why is the banker not doing it if the governor himself is saying that go ahead and lend to an NPA?

Gupta: It is one thing at a macro level to agree what is right, it is another at the micro level to wonder how much of a risk you are taking in taking that decision. You will never be able to change CBI, CVC, RTI structures.

Those won’t go away in a day. I have been saying this for a long time now and I think the governor, the Reserve Bank of India, the government, they have to find a one-off mechanism by which they will be able to create an empowered body that can force these decisions across at least the public sector banking space.

It may be on a one-off basis, it may be for 200 units but it has to be done. Board run companies, each going to its board, each having its own set of people to assess the risk, you can never have congruence and delay is death. There is no accountability for that delay except that the borrower suffers.

Q: This is another issue in which Diwakar Gupta is not involved. So, I will treat him as neutral party. So, many banks don’t have a chairman for so long now and big well run banks like Bank of Baroda no chairman for 6-7 months now, Punjab National Bank – 3-4 months now, Canara Bank  and these are large banks being run by 1-2 EDs. You think this itself topples over some case into NPLs?

Gupta: It certainly does. There is no second answer to this question. There are large hierarchical organisations, when they are in the government sector more or so they all look up to that one person for a cue on what is to be done. If the one person is not there then the next person is certainly never going to step into the shoes of the number one with the same kind of authority because he doesn’t know tomorrow where he will be, under whom he will be working, there is that uncertainty.

Even when there are CMDs getting 8 or 10 public sector banks to come to a consensus is hard. So, you can imagine how much it complicates and compounds the problem if the top post itself is vacant for long.

Q: The hope is that as and when after this delay the chairman are appointed they are going to get longer tenures, do you think the new system of chairman or CEO and chairman that is supposed to be coming up now will be better able to resolve, you will get more decisiveness in decisions hereafter or you are not quite sure of that?

Bansal: In this way we will be able to help in taking futuristic decisions. Whatever has happened already we need to resolve it first. Whatever the NPAs are there in the system, written off assets are there plus restructured assets which are bound to fall into the stressed category may be after 6 or 24 months, it is like tsunami of NPAs, we need to resolve this.

Most of the accounts of State Bank of India, PNB, Bank of India or Bank of Baroda are the leaders. There are 7-8 banks involved in it. It is very difficult for Vijaya Bank  chairman or Dena Bank  chairman to get in touch with State Bank of India chairman and to arrive at a consensus on how to resolve an NPA account.

To my mind either the government of India or the RBI under the chairmanship of either Deputy Governor or additional secretary can have a committee. They can take ownership of 100 top NPA accounts and written off accounts and resolve these accounts.

Close to Rs 1,20,000 crore worth of assets have been written off in the banking books. Even if we are in a position to recover 40 percent or 50 percent this Rs 50,000 crore will straightaway add to the networth of the public sector banks. Similarly NPAs, whatever be the NPAs close to Rs 3 lakh crore is the NPA and 30 percent is the provision coverage ratio.

If we can sincerely resolve large accounts it will go a long way in improving the networth of the public sector banks, improving the share value and then you need not provide the capital.

What we are doing is on one side the share value is getting beaten up and today if share is quoting at Rs 200 tomorrow it will be quoting at around Rs 170, I am giving specific example of PNB. The share price was above Rs 200 when the results were not announced and today it is close to Rs 170. So, if we can improve the networth of the bank by resolving these NPAs I think we can do lot of service to the public sector banks and to the economy.

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