The recognition of bad loans is undoubtedly the first step to resolve the problem. There are two polar approaches to loan stress. One is to apply Band-Aids to keep the loan current, and hope that time and growth will set the project back on track. Sometimes this works. But most of the time, the low growth that precipitated the stress persists. Lending intended to keep the original loan current grows. Facing large and potentially unpayable debt, the promoter loses interest, does little to fix existing problems, and the project goes into further losses.

An alternative approach is to try to put the stressed project back on track. This may require deep surgery. Existing loans may have to be written down. If loans are written down, the promoter brings in more equity, and other stake-holders chip in, the project may have a strong chance of revival, and the promoter will be incentivised to try his utmost to put it back on track. But to do deep surgery such as restructuring or writing down loans, the bank must recognize it has a problem ~ classify the asset as a Non-Performing Asset (NPA).

Loan classification is merely good accounting – it reflects what the true value of the loan might be. It is accompanied by provisioning, which ensures the bank sets aside a buffer to absorb likely losses. If the losses do not materialize, the bank can write back provisioning to profits. If the losses do materialize, the bank does not have to suddenly declare a big loss; it can set the losses off against the prudent provisions it has made. The bank balance sheet then represents a true and fair picture of the bank’s health, as it is meant to.

The obvious remedy would be to tackle the source of the problem ~ to clean the balance sheets of public sector banks, a remedy that has worked well in other countries where it has been implemented. This is not a “foreign” solution. it is an economically sensible solution.

Though over time a plethora of measures have either already gone live or been under experimentation to tame the NPA monster, we strongly believe it is time stakeholders get their acts together and operate in a highly cohesive style to extinguish the evil. Specific call outs such as the role of watch dogs like credit rating agencies, valuers, lawyers, stock auditors, concurrent auditors and auditors of various companies may have to be reimagined and reconfigured in such a way as to optimize the efficacy in meeting the spirit of their role. Low remuneration of monitoring agencies does not augur well for early detection and effective management of NPAs.

Even the much-hyped IBC’s recovery track record is not that impressive which should cause a great deal of concern considering the reform agenda behind its coming into existence. One big question bothers a lot: where are we heading with an average hair cut of 70 to 75 per cent? Things are no better with the advent of forensic audits since auditors are made to deal with lack of cooperation from parties and banks. Forensic auditors need to be empowered to enforce production of records by promoters, managements and banks. Banks at times are wary of certain frauds being reported. And, of course, at times there are undesirable practices creeping into forensic audit reporting.

Tendering system for allotment of forensic audits has resulted in fixation of extremely unremunerative fees and the consequential undesirable practices. At times forensic auditors are made to chase the Resolution Professionals (RPs) and banks for their fees. In some cases, restructuring has taken place despite adverse findings by forensic auditors; this is something government and regulators must be wary of. It’s safe to say that the void created by not having a near perfect institutionalised mechanism to deal with the situation with an iron fist has made life a picnic for unscrupulous players.

In the absence of a uniform policy on deduction of payables from current assets, it is imperative for RBI to ensure uniformity in practice in the banking industry to ensure proper calculation of drawing power for proper classification of loans. Similarly, undesirable convention of allowing withdrawal of personal guarantees of promotors, which has gained ground in the last decade for no compelling reason, may be discontinued. Segregation of long-term finance from short-term finance is another essential ingredient in tackling the problem and may merit evaluation. Most importantly, it is widely believed there is an urgency in forming term lending financial institutions popularly referred to as Development Financial Institutions (DFI) to ensure exclusivity and increase the systemic efficiency in credit flow.

Most significantly for better monitoring there is a need for government to facilitate coordination between banks, revenue authorities and Ministry of Corporate Affairs to challenge the discrepancies encountered among various reportings and filings with different agencies. Also, the need for the NCLTs to adhere to timelines and not to allow cases to drag on as in the case of Unitech, JP Associates and other companies cannot be overstated.

The NPA crisis could also be partly solved by encouraging the debt market. Rather than going to the bank, corporates can enter the debt market with their requirement of money and tenure. In short, instead of involving banks, companies can enter into direct transactions. In addition to the concept of creating DFIs, the idea of forming a Bad bank to absorb all sins is widely believed to be a formidable step in the direction of easing out the NPA chaos.

We don’t subscribe to the idea of privatisation of Public Sector Banks (PSBs) as an unqualified panacea to this ever-growing malady for the simple reason that private banks’ exposure to NPAs are not substantially different from their counterparts in public sector, both in terms of quality and quantity. Functioning of certain private sector banks such as ICICI, Yes Bank, Lakshmi Vilas Bank etc. are a testimony to this. These banks have been as vulnerable to NPAs and certain practices as PSBs. However, failure in bringing high-profile defaulters to book has been a major source of disappointment and that is possibly a credible reason for undeterred spread of this ailment engulfing lending communities across state-owned banks.

There is a need to ensure that as happened with certain transactions of Asset Reconstruction Companies, Resolution Professionals do not become a mask for defaulting promoters and ultimately the assets end up with the same persons. Also, the assets should not be disposed of to enrich few promoters and/or other parties, bankers and RPs. Any such instances should be dealt with strictly.

We sign off by saying the key to NPA management lies in establishing effective processes of early detection. Similarly, on the resolution front seldom, is there an alternative to actual recovery of money from the defaulters as against the writing off loans invariably shown as reduction in gross NPAs? This window dressing practice may be a transitory arrangement of managing fancy headlines to assuage public anger and sentiments sans an enduring solution. As an aspiring emerging economy, we ought to care about this the most. (Concluded)