The banking industry has undergone a sea change after the first phase of economic liberalisation in 1991. Prior to implementation of prudential norms as per the recommendation of Narasimham Committee I and the government’s approval thereby, asset quality wasn’t prime concern in the Indian banking sector, but was mainly focused on performance objectives such as opening wide networks/branches, development of rural areas, thrust on priority sector lending, higher employment generation etc.
While banks’ primary functions is to lend, in recent times, they have become cautious. The reason being mounting non-performing assets NPAs, which became one of the major concerns. NPAs are restricted to loans, advances and investments.
As long as an asset generates the income expected form it and doesn’t disclose any unusual risk other than normal commercial risk, it’s treated as a performing asset and when it fails to generate the expected income, it becomes an NPA.
What’s the way forward? Below is a six-point strategy that could help solve the problem.
Accountability: Junior executives are often made accountable for lapses, however, major decisions are made by the Credit Sanction Committee consisting of senior-level executives. Hence it’s important to make senior executives accountable, if PSBs need to tackle NPAs.
Corporate Governance: Even though, the government had set up Banks Board Bureau in April 2016 to attract talent, corporate governance hasn’t improved to the desired level with certain issues persisting and need to be resolved urgently.
Stricter NPA Recovery: The government needs to amend the laws and give more powers to banks to recover NPAs. The Insolvency and Bankruptcy Code has brought in discipline because of fear of losing the asset. Since debtor control amendments to the Banking Regulation Act, the present scenario allows the RBI to conduct an inspection of a lender but doesn’t give them power to set up an oversight committee. The RBI has asked for nine additional powers under the Banking Regulation Act with regards to PSBs including the ability to remove CMDs and appoint them, the power to supersede the Board of Directors and make application for winding up errant banks, sanction scheme of voluntary amalgamation etc.
Credit Risk Management: Proper credit appraisal of the project, creditworthiness of clients and their skill and experience should be carried out. While conducting these analyses, banks should also do a sensitivity analysis and should build safeguards against external factors. Effective Management Information System (MIS) needs to be implemented to monitor early warning signals about the projects. The MIS should ideally detect issues and set off timely alerts to management so that necessary action is taken.
Asset Reconstruction Company: There’s a need to set up an ARC or an Asset Management Company to fast track resolution of stressed assets of PSBs. The government should initiate necessary steps to explore the feasibility after thorough discussions on pricing and capital issues.Fraud Management: Frauds in PSBs rose both in number and value over the last three years.
The number of fraud cases of more than Rs 1 lakh stood at 5,904 involving an amount of Rs 32,361 crore during FY18, whereas during FY16, it was 4,693 cases involving an amount of Rs 18,698 crore. There’s an urgent need to tighten banks’ internal and external audit systems. For the past few years, the banking industry is facing a tough time. The rise in NPAs is proving to be a key challenge. Three decades ago, too, the banking industry faced a similar situation of high NPAs, at 24 per cent. However, we overcame the situation and similarly, the prevailing stress won’t last long. (The author is former Assistant General Manager, NABARD)