Eight Steps to Cure Malady of NPAs in Banks

“ Every debt is ultimately paid, if not by debtor, then eventually by creditor ”

Judicial intervention has delayed the metamorphosis of impaired loans into NPAs, but nomenclature procrastinations can hardly delay the inevitable. No debt can remain branded as a standard asset if not serviced for ninety days, where as most of these accounts holding more than ten lac crore rupees of pile of impaired debts ,are thirsty of credit for more than 180 days.

Banking is an arterial part of economy. It is held in high esteem due to integrity and purity of its data. In order to bring in transparency, RBI has made it mandatory for all banks in India to declare NPAs through straight Through Process ( STP) without any manual intervention to enhance the sanctity of asset quality. The government could have harnessed the expertise of bankers to keep the banking accounts compliant with international NPA norms before extending the moratorium.

Under pressure to  provide succour it leveraged the administrative skills of well intentioned bureaucrats  who are distant from the intricacies of basic bank accounting. After eighty nine days of lull, the government could have remitted one EMI into each account through respective banks that hold them and recovered the EMI through extended repayment schedule. Such initiative would have truly sustained the performing nature of loans and avoided the stigma of being a restructured asset. Rebranding through courts could also be avoided.

The Indian economy is passing through a challenging phase and addition of further NPAs may prove to be last straw in the hay on a camel’s back which might bring it crashing down. An economy which is a sustenance to 1.35 billion people needs to resilient to confront pandemics. For this, the banking system has to be sturdy proactive.

As per a special report by Mr K V Kamath, requisitioned by the Reserve Bank of India 70% of banking sector debt is affected adversely at present.The deficiencies in our banking practices need an immediate overhaul . Adequate firewalls have to be built in our lending mechanism to meet the challenges thrown by the multiple borrowing affliction of aspirational Indians. Fundamental structural reforms are required to avoid snow balling of stressed assets. At least eight of them can be implemented with ease for both banks and borrowers.

• Introduction of “Udhaar Card”: National Identity of Borrowers 

• Majority of Indians own Aadhar Cards carrying salient details of their identity. There is no system to carry ones credit history. Bankers dig deep into complex and prohibitively costly CIBIL reports to disseminate loan defaults which are often disowned under the pretext of belonging to other persons having similar names. Very few Indians are covered by CIBIL.

• An Udhaar Card will be necessary to borrow from Institutions. It will carry a codified unique number containing State, City, Business/ profession code and photograph. This number will the universal loan account number of a borrower with all lenders. The chip on the card shall pull latest position of each loan of the borrower from bank operating systems.

• Udhaar Card may be scalable and issued as per the extant borrowing capacity of individual against a fee to defray the cost of its online updation.

• Udhaar Card shall empower Indians with quick borrowing muscle and facilitate banks to avoid impaired creditors and shun NPAs.

• Three Visit Policy 

• Selling credit and its derivatives is the only job of lenders but they force borrowers to make multiple visits by raising peace-meal queries. There are no turn-around-time(TAT) guidelines and Five Minute Loans consume five months to sanction.

• After submitting the loan application, the borrower should visit the bank only two more times. One to hear the decision and negotiate terms and second to avail the loan. Repayment should be online or through Standing Instructions.

• More a banker makes a borrower chase a loan, more the banker has to chase the borrower to recover the EMI.

• The IT enabled application, sanction, monitoring and repayment process should replace personal solicitations of credit as all banks are equipped with adequate and adept technology.

3. Cash Flow Based Lending.

• Despite the litigated real estate security being mostly illiquid, the first thing a banker asks a borrower is a collateral.

• The collateral is sought more to delay the loan sanctioning decision than to secure the lender.

• Little consideration is given to the cash flows of the borrower or the timelines during which he can re-convert cash into cash via raw material, stock -in-process and finished good.

• Lending emphasis has to shift from security based approach to cash flow based approach to create vibrant loan books.

4.. Repayment of Loans as per Indian Cultural Ethos and Practices.

• NPA identification system is imported from US and European financial markets and implemented in India without proper customization. 

• Indians have no social security system and depend on single source of income. They fend for themselves for family illness, famine, education and marriage expenses. EMI defaults are common during accidents, family illness, marriage or school admission times. 

• At the time of disbursement of loan, a borrower should be given an option to pay ten EMIs instead of twelve. The surplus cash in hand of remaining two months of his/ her choice can be used for family commitments without attracting any default risk. 

• Elongated repayment schedules shall enhance interest income of banks and escalate sale of products further.

5. Installation of Debt Collection Agency (DCA) in Banks.

• The role of Stressed Asset Management Branches and Recovery Cells is reactive and not proactive in banks. The follow up begins long after the loan gets impaired.

• Each bank should immediately install an IT enabled Debt Collection Agency which should follow every account from day one. Starting with seeking a feed back , it should remain in touch with borrower regularly for EMI till the loan is repaid.

• The DCA should be equipped with experts to foresee the risks of default. They should also be empowered to advise restructuring due to genuine reasons to both borrower and sanctioning authority.

• Regular advertising campaigns should be run through electronic and print media on the importance of repayment of loans which ensures recycling of funds for building the economy of society.

6. Restriction on “Anywhere Clearing Payment Mechanism” for loan accounts.

• One of the customer service reforms that has escalated creation of NPAs  is payment of clearing cheques of loan accounts any where in India. The cheques are paid at odd hours in overloaded Service branches who merely verify the signatures. No due diligence of beneficiary of cheques is done at their end.

• Borrowers have been diverting funds misusing this facility as the loan sanctioning branch does not get any opportunity to see the cheques paid online at other centres.

• Loan account cheques should be passed at credit oriented cells or branches after verifying the account specific protocols uploaded by the sanctioning branch to avoid siphoning of funds that is accumulating NPAs. The clearing discipline of paying loan account cheques can be extended by a day to enable such verification.

• With the advent of RTGS, the disbursement of loans through physical cheques and Internet Banking facility has to be curbed to avoid NPAs.

7. Value of collateral to be netted from NPA value of loan.

• As per BASEL III guidelines, each loan carries a well defined risk weight depending on the underlying security. The capital for each loan is provided based on its risk weight.

• In case of default, lenders make loss provisions on the loan depending on the underlying security. If the security is nil, full provision is made.

• There is no need to declare the full amount of loan as NPA if only a fraction of it is defaulted in terms of non servicing of interest or instalment. Only the defaulted amount net of underlying security should be declared as NPA and the remaining as Out of Order amount to show the correct picture.

• Over statement of NPA amounts due to accounting limitations has an adverse perceptional impact on the entire lending system. This diminishes the intrinsic value of debtor and sub dues the economy.

8. Setting up of Bank Dispute Courts Under Retired CMDs/ EDs of Banks.

• Banking litigations are entirely different from the economic offences. These have been rightly brought out of the purview of ordinary civil courts to NCLTs.

• Each NCLT is provided with a legal luminary as a presiding judge supported with a technical expert who is not a banker.
• India has a well organised banking administrative system which brings out Executive Directors/ Managing Directors/ Chairmen, regularly through a competitive churning system. The country has a huge talent bank of these  executives who have retired with almost four decades of hands on banking experience with them.

• Like Germany, India should harness the wisdom of retired senior bankers as Judges of NCLT Courts to expedite Resolution of Stressed Assets and reduce NPAs.

Shakespeare said in the fifteenth century, “ Neither a lender or a borrower be”, because creditors have better memories than the debtors and a small debt makes a man your debtor, a large one your enemy. But still the business of lending and borrowing is the way forward in life to bring in equality. Let us take good care of our credit otherwise credit will not take good care of us.