Bad debts: a collective convergence of interests

When the going gets tough, sometimes, one tends to look for alibis to pass the buck. How else could one interpret the articulation of this top banker?

Addressing the Foundation Day Lecture of Assocham in New Delhi recently, Arundhati Bhattacharya, Chairman of the State of Bank of India, opined that there should be collective sharing of blame for NPAs (non-performing assets) of the banks.

She hit the nail on the head when she said the blame for NPAs should be apportioned equally among all stakeholders — from project promoters to the government and lenders. In fact, she hinted that even the regulators should share a part of the blame. She suggested that aggressive bidding for projects and fund diversion from well-run firms were quite a common practice among promoters.

A combination of acts — such as letting the promoters have a lenient repayment tenure and policy flip-flops and the like — have all combined to contribute to the NPAs of the banking industry.

You may call it a collective convergence of interests. You may even view it as a confluence of individual conspiracies.

Whichever way one looks at it, the net effect is the same, that is, the banking industry is pushed down by mounting NPAs. Leading rating agencies, no doubt, have indicated that there could be some moderation in the pace of growth of NPAs what with a drop in the formation of new impaired loans in the current financial year.

A huge worry

All the same, NPAs have been a huge worry for monetary and fiscal authorities alike, who now have to contend with a number of external imponderables to keep the economy steady and growing. It is nobody’s argument that top bankers, especially those in government-owned lenders, enjoy absolute freedom even in this post-liberalisation era. It is no secret that they have to operate within a defined freedom. That, however, cannot be the right excuse to pass the buck.

In a dynamic inter-connected business environment, policy U-turns, domestic headwinds, across-the- shores happenings and the like are bound to be critical issues for managements seeking instant solutions in the banking industry.

Nevertheless, what the SBI chief hinted at cannot be ignored. Accountability can be established only when there is empowerment of responsibility. The solution must be found in putting in place a watertight loan evaluation process. Not just that. It calls for a speedy NPA recovery mechanism within the ambit of the law.

The Reserve Bank of India (RBI) has been doing its bit in this regard by appropriately empowering the banks. The rising NPAs, especially during a slowdown, is hurting the cause of a robust economy. Not surprisingly, banks have played a reluctant customer in passing on the RBI-induced interest rate reductions to their retail clients.

So much so, the common man who borrows a loan is penalised and ends up subsidising the misadventures of big borrowers.

A lasting solution, however, could come only by developing a long-term debt market so that long-gestation projects get funds from lenders who are freed from near-term NPA classification worries.

The solution must be found by putting in place a watertight loan evaluation process