Guest Colomn : How Can PSBs Control Th eir NPAs?

Public sector banks (PSBs) have been in the news for the last few months but all for the wrong reasons. The most recent report has been of the arrest of the chairman of Syndicate Bank, which exposes the nexus about the rising NPAs (non-performing assets), poor loan monitoring plus recovery process, and money laundering in effecting the public sector banking system. This is not a solitary case; poor monitoring and appraisal processes have underlined many such incidences in PSBs such as Kingfisher Airlines, Winsome Diamond, Zoom Developers, etc. There are also some cases highlighting the politician-corporate nexus though nothing can be generalised.

The gross NPAs in PSBs have gone up sharply from 2.3 per cent in 2011 to 4.7 per cent of the advances in 2014. It is important to observe that the rising NPAs in the PSBs have not peaked out when we consider the restructured advances to gross advances ratio which stood at 7.2 per cent in FY14 compared to private banks which was 2.3 per cent and foreign banks at 0.1 per cent.

In fact PSBs have been attributing the cause of the rising NPA level to economic slowdown and to their exposure towards social responsibilities’ facilitation of the government - known as ‘priority sector’ lending. It is natural for the banking industry to have higher NPAs in a slowing economy but the PSBs’ share in the total NPAs is not at all justifiable when compared with private peers irrespective of their loan portfolios. Home loans are considered a more stable and secure funding option in the banking industry. However, bad debts in PSBs’ home loan portfolios have been in the same line, along with other stress sectors. According to data compiled by the finance ministry, the NPAs in this segment were registered at 1.5 per cent as of September and higher than 1.4 per cent in March 2014 whereas private lenders like HDFC’s gross NPAs as of September 2014 stood at 0.69  per cent of the loan portfolio, down from 0.79 per cent a year ago. The deterioration in asset quality in the housing portfolio is predominantly due to the absence of proper due-diligence by the PSBs.

While the new government has tried to solve the problem at the top level by introducing a new selection process for the filling up of vacancies of chairman and managing directors (CMDs) as well as executive directors involving the RBI governor or his nominee, this is a welcome measure but the effect is yet to be seen on the ground level. Moreover, to spurt the reporting and stop the ever greening of bad loans, the regulator has also come out with guidelines for early recognition of stressed assets, which is more towards post-trauma relief and does not deal with the root cause of the rising NPAs in the PSBs.

So what is causing the higher NPAs in the PSBs? We believe it is due to controllable factors which the PSBs are ignoring in their credit monitoring process. In fact this was also pointed out by Dr. K C Chakrabarty, Deputy Governor, Reserve Bank of India at BANCON 2013 in his address when he said that the level of stressed assets as an outcome is not a large concern in itself but the extant processes, systems and structure of creation/restructuring of stressed assets are a problem and the rise in the NPAs is more to do with the deficiencies in credit appraisal, monitoring and recovery process than the economic slowdown.

The standard credit mechanism of the PSBs is poor and needs support to mitigate the common controllable cause. The most common cause of NPAs in the PSBs are excess reliance on promoter submissions or undertaking or an inclination towards documentation without independent proper verification, which gives a window for various frauds like over-capitalisation / over-invoicing of project cost, siphoning / diversion of funds for different purposes i.e. real estate, share market, arm’s length transactions benefiting controlled entities, etc. Moreover, a mechanism to determine promoter contribution is also not in place as it is done by private lenders.

What generally happens in a credit cycle is that the borrower submits an application for loan with DPR and the PSBs ask for a Techno Economic Viability (TEV) report from the borrower. A TEV agency is appointed by the borrower and the report is generated based on the DPR and other information in consultation with the promoters. Generally, no discussion / no questions are raised with the agency which prepares the TEV and no independent views are taken by the lender. Most importantly, no responsibility is assigned or action taken against the TEV agency and other intermediaries for their gross negligence.

In addition, PSBs lack effective tools as well willingness in accretive monitoring for its current loan portfolio. The current monitoring mechanism which is in place likes concurrent audit or stock audit; PSBs generally defer their appointment, which also gives a chance of diversion of funds. Cash flow monitoring is also not properly placed.
The PSBs need to revisit their credit process as a whole and re–strategize with the use of newer tools and technology. The PSBs have to have inbuilt processes whereby monitoring of funds as well as promoters can be an ongoing process rather than a ‘wait and watch’ approach.