July 2, 2022
  • July 2, 2022

Bank cleaner or killer of the Indian economy?

By on March 9, 2021 0

NPAs, a shorthand term commonly used for “non-performing assets” among banks and borrowers, is proving to be a draconian provision for the entire business community. Bankers are also petrified by this app as it not only eats away at their good money, but also scares them with its implications time and time again, seeking their personal responsibility. What is this NPA phenomenon that has made the entire banking industry dizzy and borrowers are facing such a heat with many of them closing their stores? All borrowing companies, regardless of their size, whether large or MSME, engaged in any of the economic activities and providing jobs to millions of workers, are covered by this provision of NPAs. So let’s understand what these post codes are?

In accordance with the Reserve Bank of India guidelines for banks, “Loans and advances made to various categories of borrowers will become NPAs when they cease to generate income for the bank and when interest and / or payment of the principal amount of the loan remain in arrears for a period of more than 90 days or the account remains “in default” with regard to an overdraft purchase / cash credit / continuous invoices in excess of the authorized limit / drawing power for 90 days ” .

The RBI called the recognition of NPAs a step towards “cleaning up bank balance sheets” to make them financially stronger. However, the overall impact of the application of this provision on the economy has been extremely unfavorable. Borrowers from banks whose accounts are clarified as non-performing include businesses, industries, including micro, small and medium-sized enterprises, traders, and exporters that not only generate the country’s wealth and GDP, but also provide income. jobs for more than 200 million people in the country. The entire economy therefore depends on these companies to achieve the country’s GDP growth, increase per capita income and reduce poverty. Thus, on the one hand, there is the question of the health of the banks and their consolidation and on the other, the sustainability of the country’s economy, GDP growth and employment. There cannot be one against the other because both are important for the growth and prosperity of the country.

Banks have been lending to all kinds of borrowers since their inception, with lending being one of their primary goals. Almost all of these loans are generally secured by taking primary securities and / or collateral, including personal guarantees from borrowers. Thus, on the whole, bank loans are supposed to be secured by collateral and tangible and intangible guarantees. The granting of loans classified as NPA advocated by international banks and put in place by the Reserve Bank of India for Indian banks has created a chaotic situation throughout the funding echo system and it turns out to be the biggest destroyer of wealth and jobs in India. The NPA classification standard was never part of the original fundamentals of loan security, liquidity and “return on investment”. It is well known that there may be many reasons for delays in repayment of installments and interest, whether real or not, but the NPA problem has overtaken all other principles of the lender-borrower relationship due to which many companies are classified. as “Non-Performing”, which makes them “Untouchables”. Once declared NPA, they fall out of favor and carry stigma among their peers and the banking community, making it extremely difficult for them to redeem their lost glory.

Since the current NPA standards were introduced and forcefully enforced since 2013, its adverse effects have cast a shadow over all stakeholders, namely banks, corporations, MSMEs, exporters and all other contributing companies. economic development and employment. The banks for whose benefit and health this provision was introduced are themselves the hardest hit, as their large part of their loan portfolio has been classified as NPA, forcing them to make provisions for losses, which has led to the erosion of their capital and net worth. The government therefore has to disburse huge funds from the treasury to recapitalize them. This burden on the chessboard is ultimately borne by the public through taxes. So, banks suffer, the public suffers, businesses suffer, the country’s economy and GDP suffer and, more importantly, employment suffers heavily as not only operating businesses shut down or shut down, but, Due to fear of NPAs, even new ideas with high growth potential also become less entrepreneurial to avoid risk taking. On the other hand, banks have also become very cautious in lending to new projects because they cannot inaccurately account for future cash flows that would be sufficient to ensure the timely service of disbursements from the bank. debt and interest expense. Bankers can ensure that they do their due diligence and properly assess loan proposals and adhere to lending principles, but they cannot oversee the day-to-day operations of the businesses they lend to. It erodes their own banking business and their viability.

Impact of NPA standards

Banks that previously resolved many of these irregular debts under various restructuring plans and were able to collect much of these arrears suddenly found themselves with no choice but to book losses as the RBI decided to pull all of them. these restructuring plans. Due to the RBI’s strict application of 90-day NPA standards, bank NPAs have started to increase since 2013 and have reached over 10% of loans.

The question that arises from the above is whether our economy and especially the banking system is winning or losing against the 90 day NPA standards. We should not run out of wood for trees and should not forget about the needs of our growing economy with huge need for funds to reduce poverty and unemployment of people. To align with international practices, we cannot afford to undermine the entire banking and financial system and put pauses in the momentum generated by our country’s economic growth. The NPA standards did exactly the same.

The banks have practically stopped lending, economic growth has slowed and unemployment has been increasing day by day. For no good reason, previous Reserve Bank of India guidelines for resolving stressed assets like loan restructuring, corporate debt restructuring and the Joint Lenders Forum mechanism, strategic restructuring of the debt and the sustainable structuring of stressed assets have been removed for all practical purposes. . With the introduction of the Insolvency and Bankruptcy Code, the accounts of operating companies are submitted to the courts of the NCLT for resolution.

Go forward

Current RBI guidelines on identifying and provisioning NPAs have all but led to the collapse of loan and investment growth and the creation of new businesses as banks are wary of new loans for fear of generating more postcode. As a result of this traffic jam, all sectors of the economy are suffering. The government suffers because it has to disburse huge budgetary funds for the recapitalization of banks, the public suffers because it is deprived of bank financing for growth, employment suffers due to the lack of new investments and financing banks and financial institutions. Even the banks for the benefit of which the NPA provisions were introduced, also suffer from a huge reduction in their profitability and their shareholder value. Clearly there is a loss for everyone. It is therefore high time to review and revise the current NPA standards taking into account the needs and circumstances of India.

The following two measures can bring substantial relief to the situation:
The work cycle of generally all kinds of commercial enterprises extends well beyond the period of 90 days from the date of purchase of the raw material until the date of realization of the proceeds of the sale. It is necessary to reconsider this 90-day provision to classify their excess contributions as NPA. It is desirable that the 90-day limit set by the RBI for classifying excess contributions of business units be increased to 180 days so that they are not forced to divert their working capital to servicing their loan payments in the future. cost of their normal business operations. .

RBI should reinstate “stressed asset resolution” program like “one-time settlement” and “corporate debt restructuring” and so on.

These changes in RBI guidelines will prevent large numbers of businesses from falling ill or shutting down, resulting in loss of economic activity and jobs. This will further prevent the avoidable classification of bad debts and also avoid recourse to unwarranted litigation by banks and also prevent them from losses.



The opinions expressed above are those of the author.