Rs 90,00,00,00,00,000

As the government and the ­Res­erve Bank of India (RBI) try to shake the Rs 13,000-crore PNB-Nirav Modi monkey off their backs, the bomb ticking on the banking sector’s doorstep is the rocketing NPAs (non-­per­forming assets). The last financial ­stability report by the RBI states that the asset quality of banks had deteriorated further with the gross non-­performing assets (GNPA) ratio likely to rise from 10.2 per cent of gross ­advances in September 2017 to 10.8 per cent in March 2018 and further to 11.1 per cent by September 2018.  That may be well over a whopping Rs 9 lakh crore by the end of this year.

Barring a few categories, loans for which no repayment has been made for 90 days are classified as NPAs. Under the various restructuring schemes, banks were prone to ever-greening big corporate and infrastructure loans to prevent them being classified as NPAs. This was contrary to the spirit of the restructuring schemes, according to senior bankers. “The main purpose of restructuring per se is to revive a unit. You resort to it only when you are sure the unit has prospects. Accounts can often go bad because of market conditions. In the case of a manufacturing unit, if the indicators are good and it shows possibilities of doing well once the market conditions improve, then the banker may take a decision to restructure a loan,” says a senior banker.

The RBI till recently permitted restructuring of loans only in cases where there was a possibility of a unit becoming viable in future. But predictably, restructuring had become a tool for postponing or avoiding an account turning into a non-performing asset, as that would trig­ger loan recovery proceedings. The bank would also have to make additional provisioning for the NPA, as per the RBI rules. “This had resulted in senior bankers consciously restructuring eight out of ten loans to prevent them slipping into NPAs,” the banker states. Technical evaluation is mandatory for any advance or loan of Rs 5 crore or more at the stage of sanctioning or restructuring. This is all the more ­important at the latter stage, as it facilitates taking an informed decision on whether the business holds potential for revival or not. Often, the restructuring was done just ahead of the fiscal year closure without any proper technical evaluation; in-house experts carried out this evaluation in 90 per cent of cases.

Under restructuring, the defaulting company would be provided enough money to pay back the original unpaid dues and get additional funds to keep the project moving or even expand it. But with more overdue loans being declared stressed assets or NPAs, between 2014-15 and 2017-18, the banks have had to make provisioning of Rs.3.79 lakh crore. Now, the Insolvency and Bankruptcy Code has been amended, barring the defaulter from bidding and getting back the assets of the company declared bankrupt. Another major loophole plugged from March 1 is the restructuring of loans. The result is that the quantum of NPAs of banks—both public sector and private—is expected to go up further this year. Up to September 2017, as per RBI data, the gross NPAs of scheduled Indian banks stood at Rs 7.34 lakh crore.

D. Thomas Franco, general secretary, All India Bank Officers Confederation (AIBOC), is apprehensive that the RBI decision to stop all restructuring of loans will dent the profitability of most banks. “It is the RBI which has been changing the asset classification norms periodically and, with every change in norms, the NPA level goes up. Now with the scr­apping of restructuring schemes, all loans classified as NPA for 180 days will have to be transferred to the National Company Law Tribunal (NCLT), and a reserve of 50 per cent of the outstanding loan has to be created,” states Franco. “If this is implemented then all PSU banks will be ­reporting losses in April.” AIBOC has estimated the potential losses to be Rs. 88,000 crore. This is expected to hit not just PSU banks but also some private banks like Axis that have high NPAs.

What can be done to at least delay the NPA bomb from going off? The Parliamentary standing committee looking into this had made some recommendations in 2016, some of which are being implemented now. In January, new guidelines for corporate lending were released which include a requirement for rigorous due diligence, a tie-up of banks with agencies for specialised monitoring post-sanction for loans above Rs. 250 crore, a fixed 10 per cent minimum exp­osure for large consortium loans, strict segregation of pre- and post-sanction roles and responsibilities, and ring-fen­cing cash-flows by keeping strictly to the loan’s preset conditions. “Banks will have to get down to a more responsive, res­ponsible and clean banking with full use of technology,” states Rajiv Kumar, sec­retary, financial services. That may be true, but going by past record, none of the RBI’s directives is taken seriously. After all, even with the lofty-sounding SWIFT (Society for Worldwide Interbank Financial Telecommunication), Nirav Modi ran away with thousands of crores. While the RBI holds the concerned banks responsible for the lapses, banking offi­­cials blame the regulator for not spotting discrepancies in the data it got through the SWIFT ­system on a daily basis.

The banks also say they do not bear the sole blame for many of the NPAs. C.H. Venkatachalam, general secretary, All India Bank Employees Association (AIBEA) says the bulk of the NPAs are the result of large and long-term financing provided to infrastructure projects. “While loans should not be given blindly, there are many in-built difficulties in following the prescribed rules and procedures and in carrying out full appraisals, particularly in infrastructure projects. Borrowers frequently plead an inability to repay, stating that the project costs have gone up. In view of these unforeseen events, as most of these projects are very big, the government should also take ­responsibility and not just leave it to the banks to handle the appraisal,” he says.

Many bankers maintain that it was government pressure that substantially hiked the exposure of banks to the infrastructure sector since early 2000. The economic boom saw huge lending with everyone trying to cash in on the growth prospects. Prof Vikas Srivastava, IIM Lucknow, attributes the large NPAs in infrastructure to the “irrational exuberance of banks prior to 2007 when there was a huge boom in corporate credit. Infrastructure financing requires a specialised skillset to ass­ess the techno-economic viability of projects and also to ensure the veracity of the projected statement for revenue, which was not happening as these specialised skillsets are available only with a few large banks.” Based on his study of infrastructure funding, Srivastava says that many smaller banks across the country have been lending to infrastructure projects on the strength of information provided by larger banks, without undertaking a full-blown independent appraisal. The bulk of the lending has happened in power and road projects. In both cases, there has been much overbidding for projects and gold-plating of the cost of project financing. Srivastava’s 2013 study revealed that more than 50 per cent of infrastructure projects were stuck at various stages of implementation due to a variety of regulatory hurdles and sector-specific bottlenecks leading to significant time and cost overruns. The GNPAs and restructured standard adv­ances for the infrastructure sector, tog­ether as a percentage of total advances to the sector, had shot up from Rs. 12,190 crore (4.66 per cent) at the end of March 2009 to Rs.1,36,970 crore (17.43 per cent) at the end of March 2013.

For a long time, the issue of bad debts was overlooked or hidden from public eye as banks continued to restructure loans. It was during former RBI governor Raghuram Rajan’s tenure that banks were forced to come on board and declare stressed assets and NPAs, rather than wait for 3 to 4 years after the commencement of the project to verify its viability.

Prof Charan Singh, IIM Bangalore, says, “During the fallout of the financial crisis in 2008, the pall of gloom descended. Everything started looking difficult and challenging. Therefore long term projects, particularly infrastructure projects, which were financed during the boom period, took a turn for the worse and started looking worrisome. During this period even the export scenario became complicated with the Chinese offering steep discounts to retain their market dominance. This also impacted exp­ort-oriented Indian companies.” Based on his study of banking frauds after the Kingfisher Airlines scam, Singh advises caution in viewing the whole issue as not all NPAs are necessarily fraudulent; as such, there is a need for a granular app­roach, going sector-by-sector to study where the crisis may have emerged.

At the current juncture, market experts claim that none of the private infrastructure financing companies is capable of lending huge amounts as the banks were doing. But what has changed in the last few years is the rise of the bond market. Infrastructure projects are now refinanced in different cycles, right from the initial construction phase involving land acquisition and regulatory clearances among other tasks. This is the most unc­ertain phase. Once those clearances are in place, the project is sold to others.

For banks, the scenario is less upbeat. Even as some take heart as more bankrupt companies are auctioned, at best the banks get back 60 per cent of what they are owed; it’s a small improvement on the 40 per cent returns they were getting earlier with the promoter of the defaulting company walking away with the ass­ets. Under the new bankruptcy rules, the def­aulters must either repay the loan or face the prospect of losing their assets. You can almost sympathise—it’s nearly as bad as what ordinary people face in such circumstances, with your collateral likely to be seized at the first hiccup.