FM's exhortation has wider connotation

The Government's strategy to tackle the NPA's problem should address the deleterious consequences of public ownership.

By C. R. L. Narasimhan

There may be nothing new or original about the recent exhortation by the Finance Minister to public sector bank chairmen to clean up their balance sheets. However, coming as it does from the country's highest decision making levels, the message will be taken with the seriousness it deserves. There cannot be any other matter more vexatious or difficult to solve than the problem of non-performing assets (NPAs) in the Indian financial sector. Its pernicious impact falls first on a bank's balance sheet but is by no means confined there.

Financially speaking banks incur several costs in maintaining an NPA: a holding cost that is currently in the region of 9 per cent capital adequacy requirement another 9 per cent plus income lost on opportunities foregone. Public sector bank employees long used to job security have had a limited understanding of even the financial implications of the lingering NPAs. Educating them is therefore a primary task. According to government statistics, the gross NPA level of public sector banks came down slightly over the last financial year (1999-2000) but it is still at a very high Rs. 51,667 crores. This translates into 14.3 per cent of their gross advances.

Experts even say that the problem of NPAs is the outward manifestation of all the ills of the Indian financial sector: all the other wellrecognised and frequently talked about ills - such as over-staffing, high transaction costs - are either incidental to or flow from the high level of NPAs. Since making the public sector banks competitive is an urgent task, measures to reduce the NPAs will always form the core agenda of those in charge of the public sector banks.

Old wine in new bottle

That said, it would be unwise to exaggerate the potential of the Finance Ministry's action plan to control the NPAs. Much of what has been said is repetitive: a one time settlement scheme for loans less than Rs.10 crores looks attractive on paper, but the Reserve Bank of India which has been asked to frame ``clear cut'' guidelines has quite a task on its hand. In any case, the problem of bad debts cannot be wished away either by executive fiats or by framing guidelines, however transparent and practicable they might be. Strengthening the debt recovery mechanism is a frequently talked about subject, with little progress so far to match expectations.

Nor is the move to publish a defaulters' list exactly original. The RBI has been publishing ``caution'' lists of exporters for circulation among banks. Defaulting large borrowers' names do appear on internal lists of banks although in keeping with the tradition of secrecy on which modern banking rests, seldom published for public consumption.

There is an urgent need for banks/financial institutions to exchange information on all their customers, failed borrowers including, but presuming that the publication of a defaulters' list (or even the threat to publish one) will shame the recalcitrant customers to pay up is the height of naivete.

More seriously, the efficacy of resorting to such measures lies in striking a judicious balance between the compulsions of the lenders (the banks) and the rights of their customers (which would obviously include difficult borrowers). It is of utmost importance that decisions like these are considered only after examining the current laws on the subject. As far as banking practice goes, the evidence overwhelmingly favours secrecy. Perhaps a via media - a system where those who need information, on the defaults - are given expeditiously will help. One can even think of compulsory disclosure - capital market style.

An important reform measure, this has forced promoters to disclose their financial position whenever they access the market. The spirit of this can be emulated with the proviso that greater and punitive powers will have to be given to those who administer such regulation.

Besides, there could be definition problems in classifying ``wilful'' defaulters. For instance, the value of the collateral security such as residential or office properties taken from a borrower at the time the loan was sanctioned, might have diminished considerably over the years. And the business might have failed for a few unanticipated reasons. (All business decisions are based on risks. It is silly to say that no business should fail).

Only practicable steps please

Crack down on all borrowers (after rehabilitation packages have failed), the Finance Minister has said. Irrespective of their size or influence. The practical difficulties here are common knowledge. The connection of many large defaulting borrowers with the political establishment is an undeniable fact. So too are the long delays in recovering money through the legal process. The debt recovery tribunals will have to be beefed up further with many more presiding officers.

Therefore, for reducing the level of NPAs, bank managements will have to perforce depend upon write-offs or compromises. Indeed many banks say that they have embarked on just that, with several committees overseeing the process. The latter - a committee approach as distinct from individual decision making - is a natural response of bank people who have been subject to so many inquisitions in the hands of outside agencies. Everybody agrees that to arrive at a compromise or a write-off is hazardous to the decision maker, sometimes even more than when the loan goes bad.

It will be unfortunate if the Finance Minister's action plan is not understood in its totality. The message - government owned banks to reduce their bad loans - should really be understood as an appeal for reforming their public sector character. No one from the government owned banks or from the Government would admit it but government ownership has outlived its undoubted utility of the past. Mounting bad debts is just one facet of a wider problem.

Even as the Government says that it is willing to release most of the financial institutions owned by it, it has yet to prepare their managements to exercise the freedom so vital in a competitive era. It is hoped that the Finance Minister's well meaning NPA reduction drive is followed by genuine measures for promoting bank autonomy.

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Section  : Business
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