FREE virtual training session on Passive Income Secrets: October 24 and 25, 2020, 10am to 1pm. Register Now!
Last Updated : Feb 12, 2017 10:23 PM IST | Source: CNBC-TV18

Veteran bankers brainstorm: Just how can the NPA issue be solved

Veteran banking experts believe a serious NPA problem cannot be bilaterally solved by bankers and borrowers, it has to have major policy support from the government, the RBI and the administration.

With demonetisation now behind us, the banking system is back to handling its biggest problem: bad loans. As of September 2016, the total bad loans in Indian banks stood at 9.1 percent of total loans.

According to Credit Suisse data, 16 percent of total banking sector loans are stressed. To tackle this problem the Reserve Bank had bought in two important schemes, the strategic debt restructuring (SDR) and S4A, or the scheme for stressed asset structuring.

These allowed the bankers to find new buyers for defaulting borrowers or write down up to 50 percent of the debt but they were not hugely successful.

On the other hand, after the arrest of 5 IDBI bankers in the Kingfisher case, bankers say they are in no mood to take such commercial decisions that will be questioned as mala fide at a later date.

So the moot question remains how does one crack the NPA issue?

Veteran banking experts believe a serious NPA problem cannot be bilaterally solved by bankers and borrowers, it has to have major policy support from the government, the RBI and the administration.


KC Chakrabarty, Former Deputy Governor, RBI thinks the NPA problem cannot be solved by the banks alone. “If NPAs of this magnitude have been created in the system, let us admit we are all collectively responsible for that.” 

Chakrabarty says the whole crux of the problem is we have not understood why NPA has been created.

"There needs to be a lot of support from the state where the projects are there, banks alone cannot raise capital for the borrower. So, unless we understand those issues we will never be able to solve the issue, we are only talking about peripheral things and postponing the things and making the things more and more difficult," adds Chakraborty.

AK Purwar, Former Chairman, State Bank of India believes a coordinated effort particularly from the government and from RBI, a policy initiative, under that policy initiative various players – government, the people, RBI, they all join together to sort this issue.

Ranjana Kumar, Former Chairperson, Indian Bank is of the view that recruitment of personnel is the key to solving NPA mess. According to her, all NPA issues are not created by external factors.

Talking about the SDR and S4A schemes, Purwar said during his time as a banker he had never seen a 50-75 percent debt write-offs.

Below is the transcript of KC Chakrabarty, Ranjana Kumar and AK Purwar’s interview to Latha Venkatesh on CNBC-TV18.

Q: The problem is for all to see. Until September 2016, you were the Chairman of this advisory board which would advise the CBI as to which case was to be investigated and which was a good banking decision. That board has closed down. Can you take us through what that board did and whether there is a reason to revive that board?

Kumar: This board has been in existence for at least a decade and a half. The board came into being under the directions of the Central Vigilance Commission (CVC) because bankers even then, even two decades back, bankers had these apprehensions that they would be picked up by these investigation agencies, the Central Bureau of Investigation (CBI) and CVC. So to give them this sense of comfort, this board was installed and which was to be, the Chairman of the board would be a former banker or a deputy governor, either way and there would be another senior banker in that, there would be a CBI person or an IPS officer and another senior bureaucrat and also a chartered accountant.

Now, the main mandate for this board was that we would be receiving these accounts which from the CBI, we would be getting these accounts from the CBI where there was a difference of opinion between the bank and the CBI. So, before they take a case for sanction or prosecution, this should be vetted, duly deliberated at the board. The board was competent to do it. But I would not be able to tell you all the reasons for that.

But suffice it to say that the requisite number of cases have not been coming to the board. In fact, when I took over in 2014 in September, I personally went to the CVC, I met them, I initiate a dialogue with the CBI then and to tell them that we need more cases. So, few cases trickled down. But the question is there are many more who have fallen into this category. Now, I am not aware that the board has since been closed or not, but I left office in 2016.

Q: I am given to understand that nobody was appointed after your term ended because they thought that there were not enough cases. But in a case like Kingfisher, how would it work? They would have asked the board whether a prosecution should be done?

Kumar: Yes, of course. In the sense, what I am saying is that in any case, why only Kingfisher? Any of the cases where the bank is having a different opinion and the bank seeks an audience to say that I should be heard. That comes to us. Those cases actually have to come from CBI, not from CVC, not from the bank. This is how the ruling is technically. I am talking of the technical part, it comes to us from the CBI.

Q: If enough opinion is raised probably, the board will be revived, but the question I am asking you is bankers today, one reason why some of the NPA deals are not getting done is this fear of arrest. Do you think this advisory board is a solution to this problem of fear among bankers?

Chakrabarty: Advisory board will not be the solution because even if you take the Kingfisher case, it has written to the advisory board and they have sanctioned the prosecution. It is a three-year old case. It has been resolved before three years. Even Mrs Ranjana Kumar came to the advisory board. So, all what I am saying, we have not defined what is a business case, we have not defined what is fraud, we have not defined what is corruption. In the absence of this, these are all arbitrary, discretionary. And so this thing will not work now.

Coming to bankers becoming risk averse, I do not say that it is acceptable. They should resign. If they cannot take decision, they should resign from the job. But you cannot say I will be in the job, I will be drawing salary, but I will not take the decision. At least I have not done and I am very sure Mrs Ranjana Kumar or Mr Purwar have never done this thing in life.

Yes, that does not mean we do not require improvement. We need to make the thing transparent, we need to define the thing. A lot of work need to be done. Then only this fear part can be removed. What I am saying that because of accident, we should not stop functioning. Out of 1,000 cases, only one case, some case has been filed, somebody arrested and they if they have not done anything wrong, nothing will happen to them, except from harassment. This is a job hazard, we have to accept. And nobody in the system should accept that because of that people who are drawing salary, they would not do their normal job. We must fix the accountability for not doing the job also.

Q: I take your point that bankers are not above board in almost any case. Decisions can be questioned. But your opinion Mr Purwar? Do you think bankers have a case when they say that even in the Kingfisher case that on hindsight, a commercial decision gets bracketed as fraud.

Purwar: One thing I will tell you. I have spent all my life banking. Having said that, the banking business or the lending business or the commercial banking business is a business where you take some good decisions, you do not take some good decisions. But if the bonafides are not in doubt, the bonafides are not questioned, then good decisions and bad decisions are a part of the decision making process. Only God can take 100 percent correct decisions.

Having said that, the bankers who are on their chair today, it is their bound responsibility to resolve these NPA issues. They cannot take shelter that if one accident has happened and therefore I would not decide, that is simply not acceptable.

Q: I am not saying that there is a general strike or anything, but I am saying that there is genuine fear in the minds of bankers especially when the S4A scheme allows you to write down 50 percent of debt. Their fear is it will questioned on hindsight.

Purwar: I have certain views there also. We must understand that present Chairmen who are there, they are all veterans of 30-40 years. All these big cases which are there, they have seen, gone through this and they have taken decisions depending upon the merits of individual cases. And if the write downs were involved, they have taken those decisions in the past and if one accident has happened, I feel that it will have a very temporary effect, maybe a couple of months, maybe a couple of weeks. And after that, banking system will come back.

But the issue which you raised, that 75 percent write off or 50 percent write off, I have not seen every in my life. We have done huge amount of restructuring when I was there in State Bank of India. We used to take cases and primarily, if these kinds of write offs take place, perhaps half of the capital of the banking system will get wiped off.

Q: A great deal will and that is why you will have to recapitalise them if it will have to be done.

Purwar: No, that is where, these need to be thoroughly looked into and only after thoroughly getting looked into, only then the write off should be very selectively resorted to.

Kumar: I would just like to add a point here. Today, let me tell you, I worked as Vigilance Commissioner for four years. Most of the time the officers who get into problems are those officers who are at the field, the Branch Managers, they are the ones who get hit and they are the ones who are taking decisions, mind you. Some of them are really Chairman material to come up. So my point is that we need to motivate our officers.

Another very important thing is look at your Chief Vigilance Officers. You get them selected that would be a mechanism. Now the Chief Vigilance Officer should have a background of working in the credit department of the bank. He should be working. If he is not, he gets posted at a particular place because he wants to be there. But if his knowledge of credit specially is very poor, every case which comes to him is going to be seen in a particular eye. He will say something is wrong and better to put it like that.

Another point. Before a disciplinary authority in a bank which could be a DGM, could be a GM, before he signs the charge sheet, he has got to verify it, the voracity of it, the substance behind it; he signs the charge sheet and sends it. Let me tell you, CVC is only giving you decisions on what you are sending them. So the bank themselves are giving them material and then saying that you are taking this stand.

One last point. CBI do pick up cases suo moto from the market when they get. But my point is, and CBI is very sensitive. It goes by your policies, goes by the bank’s policies. So if you go against the policies, you are finished. My point is what stops bankers to review their policies, make them more pragmatic, make them more practical and they take it to the board and get it done. No outsider does it here.

Q: We have agreed that bankers will have to take the decision and the fear of arrest will come and go and it will pass. However this large problem of NPL itself, do you think that it should be bilaterally solved by bankers, the way it has been attempted now or has the time come to look for a public sector ARC or a bad bank?

Chakrabarty: In December 2013 I have given a talk, ‘Two decades of credit administration: looking back and moving ahead’, I have said this problem cannot be solved by banks alone. If NPAs of this magnitude have been created in the system, let us admit we are all collectively responsible for that. It is government, it is RBI, it is the borrowers, it is the banker including the down level staff which Ranjana Kumar was saying that appraisal techniques are not there. So, it cannot be solved by the bankers alone bilaterally.

It requires a massive effort, collective effort of the society as a whole, everybody has to understand and believe me that this total amount of stress asset is today to the tune of Rs 2000000 crore and unless you solve that the economy will not move ahead. So, it will be a collective responsibility of everybody, collective effort and to resolve the present NPA and ensure a system where new NPAs will not be created, both have to go together. It cannot be solved by the bankers alone, the problem has gone beyond their head. It has to be everybody’s effort.

Q: So, something like a bad bank, something that is government administered has to come in is what you are saying?

Chakrabarty: Government, commercial I don’t mind but government support will be necessary. Government has not done extraordinary job, bureaucracy is very inefficient. They have not done great job, so let us not say that. However we have to create a policy support framework, we have to bring the commercial decision making process and we have to bring everybody, we have to bring the necessary skill. How to revive a unit? Bankers cannot do themselves. There has to be lot of support from the state where the projects are not going ahead. It cannot be done by the banks alone or the borrower alone. Borrowers have no capital, who will bring the new capital? You cannot say only bankers. We have not understood why this NPA has been created. Unless we understand those issues we will never be able to solve the issue, we are only talking of peripheral things and postponing the things and making the things more and more difficult.

Q: What would be your solution?

Purwar: The way in which I look at it is, I agree with KC Chakrabarty, that today it is a national problem. Having said that, you have to create a structure where commercial banks get encouraged to take responsible, appropriate decisions to revive these units. What KC Chakrabarty is hinting at is lot of infrastructure loans which have gone bad, there are small issues like last mile approvals, last mile issues, if those things are taken care off then these assets could easily be brought back and revived. That is why initially when you said 75 percent loss, 50 percent loss, my reaction was that if that is the case there is something seriously wrong with the appraisal system. I have still full faith on the appraisal system of the banking sector.

So, to that extent a coordinated effort particularly from the government and from RBI, a policy initiative, under that policy initiative various players – government, the people, RBI, they all join together to sort this issue. However decision making per se we have to encourage commercial banking system to take decisions.

Q: So, something like the project management unit which was there in the previous government, the one that Anil Swarup headed, something like that is what you are looking at where government, all ministries of government and bankers were trying to coordinatedly solve specific issues?

Purwar: Yes, particularly in infrastructure loans the infrastructure related ministries will have to really support. A big chunk of loans is from that sector.

Q: I thought Ranjana Kumar you were saying that there is also a lack of knowledge of the entire system in being able to appraise such large loans?

Kumar: Of course, in your selection of people. Where do I start from? If I am understood in the right way, with due respect to everyone, I want to say even while you are selecting people starting from your AGM, DGM, GM, EDs and right upto the chairman level, with due respect to everyone, your chairman who is there today should have worked as a branch manager somewhere, should have worked in credit, should have worked as a zonal head or a regional head, he should have that experience, then he will be able to understand the problems of the branch. The question is the situation is very precarious.

We are talking of bankers not being able to really function as you just mentioned, first of all they need to look inwards, there are lot of problems with their present techniques of appraisal, their monitoring, the basic mindset of young officers, their assertiveness is not being encouraged in banks. What I am saying is till such time we do all this, what is very important and what can be done within a very short period of time is that all banks, all 24 nationalised banks need not have to do everything.

My point is can we specify, can the government, the finance ministry, RBI and the banks themselves, specify that lets us say a dozen banks will take care of corporate credit, large accounts and also in terms of export finance, all large non-fund based business, they would be doing it because they would have the expertise, the knowledge, the experience all put together. The other banks can take care of MSME sector, the retail finance, the housing loans and of course agriculture has its own prominence.

What bankers have to understand that for every NPA economy cannot be made responsible, every NPA is not a creation of external factors. At the same time every NPA is not also malafide. Lot of decision have been taken by officers because they are ignorant of it. Can you imagine in a fund based limit, we release the funds immediately, for non-fund based limit like a guarantee or letter of credit (LC) you are not parting with funds immediately and that is why you call it a non-fund based limit. However in terms of banking this non-fund based limit requirement requires a very rigorous appraisal, a very rigorous gone into as you would do for a fund based because the moment the LC is devolved or the guarantee is done away it becomes a fund based.

First Published on Feb 11, 2017 07:06 pm