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i. ii. iii. iv. v. vi. vii. NPA the Unbridled Virus and an Emerging Challenge to Indian Banking System - The Emergence of NPA in Indian Banking & Financial Institutions and its Dimensions Adverse Effects of NPA on the Working of Commercial Banks The Unseen and Unperceived Edge of NPA Focus at Anomalies at the Credit Delivery Centre - A Detached Survey of NPA from within the Credit Agency Diagnosis of the Root Cause and Tracing the Solution -- Self-Introspection by Industry, Business and Banks In Retrospect - Efforts, Results & Review Measures Initiated by RBI and Government of India for Reduction of NPAs
NPA the Unbridled Virus and an Emerging Challenge to Indian Banking System - The Emergence of NPA in Indian Banking & Financial Institutions and its Dimensions
[The article gives the position of Indian Banking as seen in the year 2001]
Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressin g signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures effected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary pe riod have been neutralised by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking an d financial institutions. The severity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions. As at 31.03.2001 the aggregate gross NPA of all scheduled commercial banks amounte d to Rs.63,883 Crore. Table No.I gives the figures of gross and net NPA for the last four years. It shows an increase of Rs.13,068 Crore or more than 25% in the last financial year, indicating that fresh accretion to NPA is more than the recoveries that we re effected, thus signifying a losing battle in containing this menace.
Table No. I NPA Statistics -All Scheduled Commercial Banks .................................. (Amount in Crores) Year 1997-98 1998-99 1999-2000 2000-2001 %-age of %-age of Gross Net NPA to NPA to total net advances advances 14.4 7.3 14.7 7.6 12.7 6.8 11.4 6.2
Total Gross Net Net Advances NPA Advances NPA 352697 399496 475113 558766 50815 58722 60408 63883 325522 367012 444292 526329 25734 27892 30211 32632
The apparent reduction of gross NPA from 14.4% to 11.4% between 1998 and 2001 provides little comfort, since this accomplishment is on account of credit growth, which was
higher than the growth of Gross NPA and not through appreciable recovery of NPA. Ther e is neither reduction nor even containment of the threat. The gross NPA and net NPA for PSBs as at 31.03.2001 are 12.39% and 6.74% are higher than the figures for SCBs at 11.4%and 6.2%. Comparative figures for PSBs, SBI Group and Nationalised Banks are as under.
%-age of %-age of Gross Net Net NPA to NPA to NPA total net advance advance s s> 2028 17.8 % 9.2 % 5 2123 16.0% 8.2% 2 2421 15.9% 8.1% 1 2618 14.00% 7.9%> 8 2796 12.39% 6.74% 7
Table -2 : NPA of Total Gross PSBs Advance NPA (Amount in Crores) Year s 4357 7 4556 3 5171 0 5303 3 5477 3
Table -3: NPA of State Bank Group.. (Amount in Crores) Year 1997-98 1998-99 1999-2000 2000-2001
Total Gross Net Advances NPA NPA 113360 118959 129253 150390 15522 18641 19773 20586 6829 7764 7411 8125
%-age of %-age of Gross Net NPA to NPA to total net advances advances 14.57% 6.98 % 15.67% 7.74% 14.08% 6.77% 12.73 % 6.26 %
Table -4: NPA of Nationalised Total Gross Net Banks. Advances NPA NPA (Amount in Crores) Year 1997-98 1998-99 1999-2000 2000-2001 166222 188926 224818 264237 30130 33069 33521 34609 14441 15759 17399 16096
%-age of %-age of Gross Net NPA to NPA to total net advances advances 16.88 8.91 16.02 8.35 13.99 7.80 12.19 7.01
Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures. There is the practice of 'ever -greening' of advances, through subtle techniques. As per report appearing in a national daily the banking industry has under-estimated its nonperforming assets (NPAs) by whopping Rs. 3,862.10 Crore as on March 1997. The industry is also estimated to have under -provided to the extent of Rs 1,412.29 Crore. The worst "offender" is the public sector banking industry. Ninetee n nationalised banks along with the
State Bank of India and its seven associate banks have underestimated their NPAs by Rs 3,029.29 Crore. Such deception of NPA statistics is executed through the following ways.
y y y
Failure to identify an NPA as per stipulated guidelines: There were instances of `sub standard' assets being classified as `standard'; Wrong classification of an NPA: classifying a `loss' asset as a `doubtful' or `sub standard' asset; classifying a `doubtful' asset as a `sub -standard' asset. Classifying an account of a credit customer as `substandard' and other accounts of the same credit customer as `standard', throwing prudential norms to the winds.
Essentially arising from the wrong classification of NPAs, there was a variation in the level of loan loss provisioning actually held by the bank and the level required to be made. This practice can be logically explained as a desperate attempt on the part of the bankers, whenever adequate current earnings were not available to meet provisioning oblig ations. Driven to desperation and impelled by the desire not to accept defeat, they have chosen to mislead and claim compliance with the provisioning norms, without actually providing. This only shows that the problem has swelled to graver dimensions. The international rating agency Standard & Poor (S & P) conveys the gloomiest picture, while estimating NPAs of the Indian banking sector between 35% to 70% of its total outstanding credit. Much of this, up to 35% of the total banking assets, as per the rating agency would be accounted as NPA if rescheduling and restructuring of loans to make them good assets in the book are not taken into account. However RBI has contested this dismal assessment. But the fact remains that the infection if left unchecked will e ventually lead to what has been forecast by the rating agency. This invests an urgency to tackle this virus as a fire fighting exercise. Financial institutions have not far lagged behind. NPAs of ten leading institutions have reported a rise of 11.89 per c ent, or Rs 1,929 Crore, to Rs 18,146 Crore during the year ended March 2000 from Rs 16,217 Crore last year. The NPA statistics of the three leading Financial Institutions for the last two years are given in Table -5 IDBI tops the list by notching up bad loans worth Rs 7665 Crore by March 2000. In fact, its NPAs have gone up by Rs 1,185 Crore from Rs 6,490 Crore in the previous year. IFCI followed with NPAs of Rs 4,103 Crore, but it reported fall of Rs 134 Crore from the previous year's level of Rs 4,237 Cror e. ICICI's NPAs went up to Rs 3,959 Crore from Rs 3,623 Crore in the previous year.
Table 5 NPA Statistics of the three Total Total NPA-% NPA-% Major Term Lending NPA NPA Loans Loans age age Institutions as at 31.3.2000 31.3.2001 31.3.2000 31.3.2001 31.3.2000 31.3.2001 31.03.2001. (Amount in Crores) Name of FI IDBI 57099 56477 7665 13.4 8363 13.9 ICICI 52341 57507 3959 07.6 2782 05.2 IFCI 19841 18715 4103 20.7 3897 20.8
accounting standards, but keeping the balance sheets opaque. T his artificially conveyed picture of 'all is well' with PSBs suddenly came to an end when the lid was open with the introduction of the prudential norms of banking in the year 1992 -93, bringing total transparency in disclosure norms and 'cleansing' the bal ance sheets of commercial banks for the first time in the country.
healthy banks (those that are currently showing profits and hold no accumulated losses in their balance sheet) banks showing currently profits, but still continuing to have accumulated losses of prior years carried forward in their balance sheets Banks which are still in the red, i.e. showing losses in the past and in the present.
Impact on Profitability
Between 01.04.93 to 31.03.2001Commercial banks incurred a total amount of Rs.31251 Crores towards provisioning NPA. This has brought Net NPA to Rs.32632 Crores or 6.2% of net advances. To this extent the problem is contained, but at what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capital adequacy. The enormous provisioning of NPA together with the holding cost of such non -productive assets over the years has acted as a severe drain on the profitability of the PSBs. In turn PSBs are seen as poor performers and unable to approach the market for raisi ng additional capital. Equity issues of nationalised banks that have already tapped the market are now quoted at a discount in the secondary market. Other banks hesitate to approach the market to raise new issues. This has alternatively forced PSBs to borr ow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margin, else they are to seek the bounty of the Central Government for repeated Recapitalisation.
Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs.32632 Crores absorbs a recurring holding cost of Rs.2300 Crores annually. Considering the average provisions made for the last 8 years, which works out to average of Rs.3300 Crores from annum, a sizeable portion of the interest income is absorbed in servicing NPA. NPA is not merely non -remunerative. It is also cost absorbing and profit eroding. In the context of severe competition in the banking indu stry, the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. The options for these banks are lost. "The spread is the bread for the banks". This is the margin between the cost of resources employed and the return there from. In other words it is gap between the return on funds deployed(Interest earned on credit and investments) and cost of funds employed(Interest paid on deposits). When the interest rates were directed by R BI, as heretofore, there was no option for banks. But today in the deregulated market the banks decide their lending rates and borrowing rates. In the competitive money and capital Markets, inability to offer competitive market rates adds to the disadvanta ge of marketing and building new business. In the face of the deregulated banking industry, an ideal competitive working is reached, when the banks are able to earn adequate amount of non -interest income to cover their entire operating expenses i.e. a posi tive burden. In that event the spread factor i.e. the difference between the gross interest income and interest cost will constitute its operating profits. Theoretically even if the bank keeps 0% spread, it will still break even in terms of operating profi t and not return an operating loss. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation. On account of the burden of heavy NPA, many nationalised banks have little option and they are unable to lower lending rates competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower income from off balance sheet business yielding non -interest income. The following working results of Corporation bank an identified well man aged nationalised banks for the last two years and for the first nine months of the current financial year, will be revealing to prove this statement Table -6 (part-1) Performance of Corporation Bank .......(Amount in Crores).. Performance indicator Earnings - Non-interest Operating expenses Difference Year ended Year ended 9 months Mar. 2000 Mar. 2001 Apr.Decr.2001 270.81 303.99 -33.18 292.09 341.36 -49.27 285.85 280.52 5.33
Non-interest income fully absorbs the operating expenses of this bank in the current financial year for the first 9 months. In the last two financial years, though such income has substantially covered the operating expenses (between 80 to 90%) there is still a deficit left. Now what are the interest earnings and expenses of Co rporation Bank during this period?
Table -6 (part-1) Corporation Bank -Interest Year ended Year ended 9 months Earnings and Expense.. (Amount in Mar. 2000 Mar. 2001 Apr.Decr.2001 Crores) Performance indicator Earnings - Interest Income 1604.39 1804.54 1458.33 Exp.-Interest expenses 1146.09 1223.21 981.45 Interest spread 458.30 581.33 476.88 Operating Profit 425.12 482.21 532.06 Provisions 192.68 270.22 219.48
Net Profit
232.44
261.84
262.73
The strength of Corporation Bank is identified by the following positive features: i. ii. It's sizeable earnings under of non -interest income substantially/totally meets its non interest expenses. Its obligation for provisioning requirements is within bounds. (Net NPA/Net Advances is 1.92%)
It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March 2001, as published by RBI in its Report on trends and progress of banking in India.
Table 7- Nationalised banks operational statistics.. (Amount in Crores) Performance indicator Earnings - Non-interest Operating expenses Difference Earnings - interest income Exp.-Interest expenses Interest spread Intt. On Recap bonds Operating Profit Provisions Net Profit Year ended Mar. 2000 6662.42 14251.87 -7589.45 50234.01 35477.41 14756.60 1797.88 5405.27 4766.15 639.12 Year ended Mar. 2001 7159.41 17283.55 -10124.14 56967.11 38789.64 18177.47 1795.48 6257.85 5958.24 299.61
Interest on Recapitalisation Bonds is an income earned from the Government, who had issued the Recapitalisation Bonds to the weak banks to sustain their capital adequacy under a bailout package. The statistics above show the other weaknesses of the nationalised banks in addition to the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as under: i. ii. Their operating expenses are higher due to surplus manpower employed. Wage costs to total assets is much higher to PSBs compared to new private banks or foreign banks. Their earnings from sources other than interest income are meagre. This is due to failure to develop off balance sheet business through innovative banking products.
are inseparable. Business is an exercise of balancing between risk and reward. Accept justifiable risks and implement de -risking steps. Without accepting risk, there can be no reward. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. This has affected adversely credit growth compared to growth of deposits, resulting a low C/D Ratio around 5 0 to 54% for the industry. The fear psychosis also leads to excessive security -consciousness in the approach towards lending to the small and medium sized credit customers. There is insistence on provision of collateral security, sometimes up to 200% value of the advance, and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over confidence), a tendency towards laxity in the standards of credit appraisal comes to the fore. It is well known that the existence of collateral security at best may convert the credit extended to productive sectors into an investment against real estate, but will not prevent the account turning into NPA. Further blocked assets and real estate represent the most illiquid security and NPA in such advances has the tendency to persist for a long duration. Nationalised banks have reached a dead -end of the tunnel and their future prosperity depends on an urgent solution of this hovering threat.
developing and transition economies since 1980 are pegged at US $ 250 billion reinforce this view." But when the banking industry in the global sphere came out of this metamorphosis to re adjust to the new order, they emerged revitalized and as more vibrant and robust units. Deregulation in developed capitalist countries particularly in Europe, witnessed a remarkable innovative growth in the banking industry, wh ether measured in terms of deposit growth, credit growth, growth intermediation instruments as well as in network. During all these years the Indian Banking, whose environment was insulated from the global context and was denominated by State controls of directed credit delivery, regulated interest rates, and investment structure did not participate in this vibrant banking revolution. Suffering the dearth of innovative spirit and choking under undue regimentation, Indian banking was lacking objective and p rudential systems of business leading from early stagnation to eventual degeneration and reduced or negative profitability. Continued political interference, the absence of competition and total lack of scientific decision -making, led to consequences just the opposite of what was happening in the western countries. Imperfect accounting standards and opaque balance sheets served as tools for hiding the shortcomings and failing to reveal the progressive deterioration and structural weakness of the country's banking institutions to public view. This enabled the nationalised banks to continue to flourish in a deceptive manifestation and false glitter, though stray symptoms of the brewing ailment were discernable here and there. The government hastily introduced the first phase of reforms in the financial and banking sectors after the economic crisis of 1991. This was an effort to quickly resurrect the health of the banking system and bridge the gap between Indian and global banking development. Indian Banking, in particular PSBs suddenly woke up to the realities of the situation and to face the burden of the surfeit of their woes. Simultaneously major revolutionary transitions were taking place in other sectors of the economy on account the ongoing economic reform s intended towards freeing the Indian economy from government controls and linking it to market driven forces for a quick integration with the global economy. Import restrictions were gradually freed. Tariffs were brought down and quantitative controls wer e removed. The Indian market was opened for free competition to the global players. The new economic policy in turn revolutionalised the environment of the Indian industry and business and put them to similar problems of new mixture of opportunities and ch allenges. As a result we witness today a scenario of banking, trade and industry in India, all undergoing the convulsions of total reformation battling to kick off the decadence of the past and to gain a new strength and vigour for effective links with the global economy. Many are still languishing unable to get released from the old set -up, while a few progressive corporates are making a niche for themselves in the global context. During this decade the reforms have covered almost every segment of the fina ncial sector. In particular, it is the banking sector, which experienced major reforms. The reforms have taken the Indian banking sector far away from the days of nationalization. Increase in the number of banks due to the entry of new private and foreign banks; increase in the transparency of the banks' balance sheets through the introduction of prudential norms and norms of disclosure; increase in the role of the market forces due to the deregulated interest rates, together with rapid computerisation and application of the benefits of information technology to banking operations have all significantly affected the operational environment of the Indian banking sector. As banking in the country was deregulated and international standards came to be accepted and applied, banks had to unlearn their traditional operational methods of directed credit, directed investments and fixed interest rates, all of which had led to deterioration in the
quality of loan portfolios, inadequacy of capital and the erosion of pro fitability. Banks have now an entirely different environment under which to operate, to innovate and thrive in a highly competitive market and their success depended on their ability to act and adapt to market changes. These called for new strategies, diff erent from those that related to regulated banking in a captive environment In the background of these complex changes when the problem of NPA was belatedly recognised for the first time at its peak velocity during 1992 -93, there was resultant chaos and confusion. As the problem in large magnitude erupted suddenly banks were unable to analyze and make a realistic or complete assessment of the surmounting situation. It was not realised that the root of the problem of NPA was centred elsewhere in multiple la yers, as much outside the banking system, more particularly in the transient economy of the country, as within. Banking is not a compartmentalized and isolated sector delinked from the rest of the economy. As has happened elsewhere in the world, a distress ed national economy shifts a part of its negative results to the banking industry. In short, banks are made ultimately to finance the losses incurred by constituent industries and businesses. The unpreparedness and structural weakness of our banking system to act to the emerging scenario and de -risk itself to the challenges thrown by the new order, trying to switch over to globalisation were only aggravating the crisis. Partial perceptions and hasty judgements led to a policy of ad hoc-ism, which characterised the approach of the authorities during the last two -decades towards finding solutions to banking ailments and dismantling recovery impediments. Continuous concern was expressed. Repeated correctional efforts were executed, but positive results were evading. The problem was defying a solution. But why? The threat of NPA was being surveyed and summarised by RBI and Government of India from a remote perception looking at a bird's -eye-view on the banking industry as a whole delinked from the rest of the eco nomy. A bird's eye view is distinct, extensive and even sharp, but it is limited to the view appearing at the surface or top -layer. It is a not an exhaustive or in-depth view. Restricted merely as a top -layer view it is partial and is not even a top-to-bottom view, where a bottom-to-top-view alone can enlighten the correct contributing factors. Flying at a great height the bird can of -course survey a wide area, but it perceives only a telescopic view of the roof - top and not the contents that exist inside t he several structures. A simple look at the whole provides summarised perception. But it is not a homogeneous whole that is being perceived. RBI looks at the banking industry's average on a macro basis, consolidating and tabulating the data submitted by di fferent institutions. It has collected extensive statistics about NPA in different financial sectors like commercial banks, financial institutions, RRBs, urban cooperatives, NBFC etc. But still it is a distant view of one outside the system and not the fel t view of a suffering participant. Individual banks inherit different cultures and they finance diverse sectors of the economy that do not possess identical attributes. There are distinct diversities as among the 29 public sector banks themselves, between different geographical regions and between different types of customers using bank credit. There are three weak nationalised banks that have been identified. But there are also correspondingly two better performing banks like Corporation and OBC. There are also banks that have successfully contained NPA and brought it to single digit like Syndicate (Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The scenario is not so simple to be generalised for the industry as a whole to prescribe a readymade package of a common solution for all banks and for all times. Similarly NPA concerns of individual Banks summarised as a whole and expressed as an average for the entire bank cannot convey a dependable picture. It is being statistically stated that bank X or Y has 12% gross NPA. But if we look down further within that Bank there are a few pockets possessing bulk segments of NPA ranging 50% to 70% gross , which should consequently convey that there should also be several other segments with 3 to 5% or even NIL % NPA, av eraging the bank's whole performance to 12%. Much criticism
is made about the obligation of Nationalised Banks to extend priority sector advances. But banks have neither fared better in non -priority sector. The comparative performance under priority and no n-priority is only a difference of degree and not that of kind. The assessment of the mix -of contributing factors should have included i. ii. iii. human factors (those pertaining to the bankers and the credit customers), environmental imbalances in the economy on acc ount of wholesale changes and also inherited problems of Indian banking and industry.
While banks functioned for several decades under ethnic culture, Indian business and industry were owned, controlled or managed by single families, all having been nurt ured and developed through innovative zeal of pioneers, represented by one dominant individual towering at each set -up. This inherently convey the sole -proprietorship culture and unable to quickly transform to modern professionally managed corporations of the global standard, where operations should be conducted on a decentralized knowledge -based work-group- an integrated teams of specialists each contributing to a core area of management. The Indian management set up everywhere turns mostly as one -man show even today. Variable skill, efficiency and level integrity prevailing in different branches and in different banks accounts for the sweeping disparities between inter -bank and intra -bank performance. We may add that while the core or base -level NPA in the industry is due to common contributory causes, the inter -se variations are on account of the structural and operational disparities. The heavy concentrated prevalence of NPA is definitely due to human factors contributing to the same. No bank appears to have conducted studies involving a cross -section of its operating field staff, including the audit and inspection functionaries for a candid and comprehensive introspection based on a survey of the variables of NPA burden under different categories of sectoral credit, different regions and in individual Branches categorized as with high, medium and low incidence of NPA. We do not hear the voice of the operating personnel in these banks candidly expressed and explaining their failures. Ex -bankers, i.e. the professional bankers who have retired from service, but possess a depth of inside knowledge do not out pour candidly their views. After three decades of nationalised banking, we must have some hundreds of retired Bank executives in the country, who can boldl y and independently, but objectively voice their views. Everyone is satisfied in blaming the others. Bank executives hold 'wilful defaulters' responsible for all the plague. Industry and business blames the government policies. An important fact-revealing information for each NPA account is the gap period between the date, when the advance was originally made and the date of its becoming NPA. If the gap is long, it is the case of a sunset industry. Things were all right earlier, but economic variance in trade cycles or market sentiments have created the NPA. Credit customers who are in NPA today, but for years were earlier rated as good performers and creditworthy clients ranging within the top 50 or 100. But what is the proportion of this content? Significa nt part of the NPA is on account of clout banking or wilfully given bad loans. Infant mortality in credit is solely on account of human factors and absence of human integrity. Credit to different sectors given by the PSBs in fact represents different produ cts. Advance to weaker sections below Rs.25000/ - represents the actual social banking. NPA in this sector forms 8 TO 10% of the gross amount. Advance to agriculture, SSI and big industries each calls for different strategies in terms of credit assessment, credit delivery, project implementation, and post advance supervision. NPA in different sector is not caused by the
same resultant factors. Containing quantum of NPA is therefore to be programmed by a sector-wise strategy involving a role of the actively e ngaged participants who can tell where the boot pinches in each case. Business and industry has equal responsibility to accept accountability for containment of NPA. Many of the present defaulters were once trusted and valued customers of the banks. Why ha ve they become unreliable now, or have they? The credit portfolio of a nationalised bank also includes a number of low -risk and risk-free segments, which cannot create NPA. Small personal loans against banks' own deposits and other tangible and easily mark etable securities pledged to the bank and held in its custody are of this category. Such small loans are universally given in almost all the branches and hence the aggregate constitutes a significant figure. Then there is food credit given to FCI for food procurement and similar credits given to major public Utilities and Public Sector Undertakings of the Central Government. It is only the residual fragments of Bank credit that are exposed to credit failures and reasons for NPA can be ascertained by scrutin ising this segment. Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all pervasive national scourge swaying the entire Indian economy. NPA is a sore throat of the Indian economy as a whole. The banks are only the ultimate vict ims, where life cycle of the virus is terminated. Now, is not the Government an equal sufferer? What about the recurring loss of revenue by way of taxes, excise to the government on account of closure of several lakhs of erstwhile vibrant industrial units and inefficient usage of costly industrial infrastructure erected with considerable investment by the nation? As per statistics collected three years back there are over two and half million small industrial units representing over 90 percent of the total number of industrial units. A majority of the industrial work force finds employment here and the sector's contribution to industrial output is substantial and is estimated at over 35 percent while its share of exports is also valued to be around 40 percen t. Out of the 2.5 million, about 10% of the small industries are reported to be sick involving a bank credit outstanding around Rs.5000 to 6000 Crore, at that period. It may be even more now. These closed units represent some thousands of displaced workers previously enjoying gainful employment. Each closed unit whether large, medium or small occupies costly developed industrial land. Several items of machinery form security for the NPA accounts should either be lying idle or junking out. In other words, la rge value of land, machinery and money are locked up in industrial sickness. These are the assets created that have turned unproductive and these represent the real physical NPA, which indirectly are reflected in the financial statements of nationalised ba nks, as the ultimate financiers of these assets. In the final analysis it represents instability in industry. NPA represents the woes of the credit recipients, in turn transferred and parked with the banks. What is the effect of the dismal situation on the psychology of entrepreneurs intending fresh entry to business and industry? Recognizing NPA as a sore throat of the Indian economy, the field level participants should first address themselves to find the solution. Why not representatives of industries an d commerce and that of the Indian Banks' Association come together and candidly analyze and find an everlasting solution heralding the real spirit of deregulation and decentralisation of management in banking sector, and accepting self -discipline and self -reliance? What are the deficiencies in credit delivery that leads to its misuse, abuse or loss? How to check misuse and abuse at source? How to deal with erring Corporates? In short, the functional staff of the Bank along with the representatives of busine ss and industry have to accept a candid introspection and arrive at a code of discipline in any final solution. And preventive action to be successful should start from the credit -recipient level and then extend to the bankers. RBI and Government of India can positively facilitate the process by providing enabling measures. Do not try to set right industry and banks, but help industry and banks to
set right themselves. The new tool of deregulated approach has to be accepted in solving NPA.
Focus at Anomalies at the Credit Delivery Centre - A Detached Survey of NPA from within the Credit Agency
[The writer is a retired bank officer in senior management with four decades of past service in one of the leading nationalised banks. He has overseen working of branches of the bank as Chief Inspector for three years and as Development Managers for two te rms. He had had occasion to study in-depth working of a number of branches big and small, as well as regional and zonal offices of the bank at the closest range with analytical precision. He has also served as Manager/Sr. Manager/Chief Manager in six large /very large branches in his tenure. He was extensively engaged in multi -agency sponsored projects of social banking in two States in the South. His propositions in this article are based on his field experience. Please also refer to pages titled "My Encounters with Corporate Corruption in my service" in this context]
Credit is a product of financial ser vice, which provides redeemable capital to industry and business. Commencing with borrowed capital a viable project generates the source for its repayment and reaches the stand -alone or self -sustaining status. Primarily there are three stages in credit extension, its productive use and its repatriation. These are, credit delivery, credit utilization and loan liquidation. Unless you are successful in the earlier stage, you do not reach the next stage. Thus if the project report and the terms of loan sanction are not handled realistically, the credit cycle will not pass on to the next stage of successful project implementation. If the project is not effectively implemented it is futile to aspire for repayment in the normal course, without the loan becoming an NPA. The credit customer need not have to search for a source to repay the loan. The source for repayment is self-generated from within and made available in time schedules coinciding with the repayment terms. The provision is in -built in the project struc ture. The bank-credit should be for productive and self -redeemable projects and should thus be self -liquidating. This then is the test for a viable project and the grounds on which the banker accepts to finance the same. The banker has to possess different knowledge resources and talents to efficiently handle credit -management at each stage. In particular the banker needs to have two primary attributes for successful credit extension. These are talent (appropriate knowledge and foresight) and integrity. The customer must possess entrepreneur ability and integrity. We may call it as two 'C's (character and capacity) to be present commonly with the financier and promoter. These are the human factors. Additionally the project financed needs to possess two characteristics, technical feasibility and financial viability. If the basic ingredients are lacking in the banker, the loan released by him will not be productively employed and it may result in potential NPA. Decades back credit risk was not so extensive, when banking was operated purely on a security -oriented approach. Accept and hold in your custody a marketable security and release the advance. Allow the activity to be carried out by the customer. Release the security when repayment is made, and in case of non-repayment dispose of the security and reimburse your exposure. It is almost zero risk oriented. Subsequently when the country was industrialised in the 60s industry was protected by the government policies. Imports were discouraged. Units enjoyed a cap tive demand without competition and hence there was no problem for the banker. But it is not so today, when banks are called upon to extend multiple types finance for diverse needs of capital for industry, business and other economic activities open to glo bal competition. Character and capacity are still the basic ingredient, but essence of these terms has acquired substantial additional content and meaning. The action or initiative is with the customer at the stage of the preparation of the project. It is with the banker in project appraisal and loan sanction including the setting up of terms and conditions. If both act prudently the first stage is passed. In the second stage the implementation responsibility is with the customer and controlling responsibil ity with the banker. In the final stage it is mainly the responsibility of the customer. A healthy joint approach promotes the cause of both, the absence of which can ruin either or both. Your analysis of NPA study should indicate whether the roots of NPA lie in the first, second or third stages of the life span of the service product. Wrong handling at any stage can obviously create NPA. Credit, which undergoes infant -mortality at the outset itself or after a short span of time after trial production, is o n account of deficiency in credit assessment and credit delivery. The loan is released, but not utilised for the purpose it was allowed and no assets are held or only negligible assets are seen. The seeds are sown but the plants never sprout and there is no question of the crops to harvest. This can be attributed to gross negligence, inefficiency or lack of training and knowledge and finally lack of integrity in
respect of the person(s) involved. These are the within factors responsible for accretion to the pool of Bank's NPA burden - lack of talent and lack of integrity. Failure in the second stage is generally on account of default on the part of the banker in carrying out his functions with foresight and wisdom. This goose will lay the golden eggs, but without waiting, if you cut the goose out of eagerness for a quick meal, it results in a sordid plight for the person of hasty action. There are two manifestos for the branch manager, i.e. the Project Report and the Memorandum Of Loan Sanction by a higher aut hority stipulating terms and conditions. In other words this is the outer limit of the delegated authority for the Bank Manager in the exercise of credit management with reference to this customer. It is also a contract between the financing bank and the b orrowing customer. The project report is the source document and the loan sanction record is a derived instrument. The sanction should be based on the project report, and if this is not so and if the sanction is at variance, the project report must be revi sed and approved/accepted by all. Once a letter of sanction is received, the existence of the project report is forgotten and the assumptions contained therein are totally ignored. No doubt the sanctioned terms represent the legal contract between the cred it customer and the banker, but the project report alone contains nucleus for the successful culmination of the activity and creating the source for repayment. During implementation of the project in the second stage involving disbursement of funds progress may not take place as scheduled in the project. The situation needs a flexible attitude on the part of the Bank manager, but if rigid adherence is resorted to the terms of sanction, it brings adverse effects to the detriment of the interests of both the banker and the credit customer. These problems were not felt so much earlier, when in the inflationary economy, when the security financed was regularly appreciating in value, and marketing the products produced, even of inferior quality was never felt a p roblem in a captive and protected market. A concrete example can explain this. The project outlay is Rs.5 Lacs. Credit customer equity is Rs.2.0 Lacs and Bank loan Rs.3.0 Lacs. Credit customer's equity includes margin for working capital Rs.50,000/ -.The Loan was to be released in January 1998 and the project to be completed in the same year. The interest and first instalment to be repaid before March 1999. Now there is delay initially in the bank completing the documents and other legal formalities and the loan was released only in March 1998. On the credit customers part there is delay of three months in the completion of the project. However the credit customer on his part did bring Rs.25000 additionally. Now events as they have unfolded are at variance wi th the assumptions in the project report. Thus the implementation report is different from the project in certain details. As at 31st March 1999, when the project is still incomplete, the bank manager arbitrarily recovers the first instalment and interest, as per the terms of sanction. If this happens, it is then woe to the project, which is still incomplete. The unit financed faces liquidity crunch due to contraction in working capital caused by term loan repayment there from and is unable to either comple te the project or provide the margin and avail the working capital. Here the bankers switch to the 3rd stage in the life cycle, while the second stage is still incomplete. Recovery can come only from generated funds and not from the source of finance for t he project. Two decades of regimented banking and directed approach to credit delivery has deprived bank managers of the instinct skill and knowledge. Lack of structured career path and restricted experience through vertical movement in the hierarchical ladder without a horizontal exposure and without imparting training in organisation and business management needed for an understanding and for the interpretation of the current business environment, are the sins of a blind promotion policy more oriented on subjectivity than objective merit assessment. Nationalised banking did not produce a spring of talent resources from within. Directive Inputs and course -direction came externally from RBI and
Finance Ministry. Execution responsibility was delegated to the nationalised banks. The system did not promote initiative and talent, but bred corruption and nepotism. Before nationalisation banks were in the private sector. Indian banking developed on ethnic and regional set -up. Every community and every section wanted to start a bank. The entire social set up was based on the joint Hindu family culture and the business looked to class banking for a select segment of society. Banking was not professionalised, as was major business and industry, which utilized bank finance. The tra der in the Mandi, the rice and cotton and oil miller did not believe that professional education is necessary for doing business. So too did bankers. The average bank employee, including a part of the top executives did have no professional education or ed ucation in modern management techniques. Bureaucratic approach and lack of talent in the service provider can also generate NPA. That happens when a project is grossly under -financed. It will also happen when the project initially is scrutinised at the low er level and found viable based on well -defined assumptions, but when finally sanctioned at a higher level, several stipulations like higher rate of interest or higher margin requirement on the credit customer stipulated like condition to raise additional internal finance by way of unsecured loans were included without looking into the feasibility and sensitivity of the variations on the overall viability of the project. Loyalty to the top man (CEO) and understandings his mind and acting as per his dictates and desires is considered as a main service-ethics. Corporate management in India is generally a one -man dominated show. This is the legacy of the spirit of the patriarch in the decade-old joint-family culture, which however has vastly dismantled. This ma nagement philosophy is against modern management concepts of defining a goal and mission for the organization. An individual is fragile and fickle minded. In the modern world, where consumerist motives predominates in the minds of all, his value systems ar e not dependable. Instead of loyalty to the mission and goals of the organization, it turns to be loyalty to the top boss, and to every top boss changing in intervals of 3 to 5 years. This is the scene of Indian Banking struggling hard to transition from o ld primitive systems and values to modern professional Business Ethics and Corporate Governance.
Diagnosis of the Root Cause and Tracing the Solution -- Self-Introspection by Industry, Business and Banks
"The health of banks is determined by many factors, the most significant being a strong capital base, adequate provisioning, the nature of investments made, the quality of asset management, the skill and commitment of officials, quantity and quality of informational data, the internal incentive mechanisms and above all the nature of governmental interference, in particular by the monetary authorities of the country in question."
Anyone could with conviction and candour say that both the management of the nationalised banks, and business & industry are equa lly responsible for the emergence of NPA at alarming levels. The root causes are inefficiency and corruption. It is due to lack of capacity and character at both places. This inefficiency and corruption can be traced from the history of the decadence that the social, political and economic institutions of our country underwent during the last six decades commencing from the Second World War. The Indian social system signifying the inherent values of business and industry underwent progressive erosion in the last five or six decades, since the second World War. The era of
pioneering philanthropic industrial barons like GD Birla or JRD Tata, wer e succeeded by annals of short-sighted industrialists, who desire more to get riches through any means of manipulation and speculative manoeuvres instead through bonafide efforts and honest means. Today we hear stories of Harshad Mehta -s and Ketan Parekh -s frequently. And it will also be seen that in every scam in the country the banks are inextricably involved with a sordid role. The fall in the standards of public life is vividly brought out in the very first chapter titled "Discipline and its Qualities" in my Project Literature on "Integrity in Public Life & Services" as under: " but in recent times old traditions are breaking very fastly. This tendency in our social values is aptly noticed and pointed out by Mr.K.Santhanam in his very informative Report , four decades ago. "In the pre -war and pre-independence era, a man was known in society by what he was. Today, he is known by what he has. " This is what Mr. Santhanam has to say: "Thus, there has come about a certain amount of weakening of the old system of values without its being replaced by an effective system of new values. The relative fixity of ways and aspirations of former times and the operation of a moral code tending tow ards austerity, frugality and simplicity of life profoundly influenced by the mechanism of social control and social responses. In the emerging Indian society with its emphasis on purposively initiated process of urbanisation, along side of the weakening o f the social norms of the simpler society signs are visible of materialism, growing impersonalism, importance of status resulting from possession of money and economic power, group loyalties, intensification of parochial affinity, unwillingness or inabilit y to deal with deviations from the highest standards of political, economic and social ethics, profession of faith in the rule of law and disregard of where adherence thereto is not convenient"
"As we look at the corruption scene today, we find that we have reached this stage because the corrupting of the institutions in turn has finally led to the institutionalisation of corruption. As the Prime Minister pointed out, the failure to deal with corruption has bred contempt for the law. When there is contempt for the law and this is combined with the criminalisation of politics, corruption flourishes. It is the honest public servant who tries to implement the law who becomes a misfit under such a situation. As of today, entire sections of our public life have become corrupt, as people like SS Gill in his book THE PATHOLOGY OF CORRUPTION have pointed out. As I see it, there are five key players in our Indian corruption scene. These are the corrupt politician (neta), the corrupt bureaucrat (babu), the corrupt business (lala), the corrupt NGO (jhola) and finally the criminal (dada). There are five reasons why our system encourages corruption. These are (i) scarcity of goods and services, (ii) lack of transparency, (iii) red tape and delay due to obsolete rules and procedures which are time consuming and encourage speed money, (iv) cushions of legal safety which have been laid down by various pronouncements of the courts and CATs on the principle that everybody is innocent till proved guilty. The net result is that the corrupt are able to engage the best lawyers and quibble their way through the system. (v) Finally, biradri or tribalism, where the corrupt public servants protect each other.
We talk about people being thick as thieves not thick as honest men!
But why should this happen at all? The outlook of the individual, business men and public servants got depraved in the aftermath of the 2nd World and subsequently on account of Government assuming more and more powers to totally control the economic life of citizens in the country, inf lating the powers of bureaucrats in the name of economic planning. The resultant situation that developed is narrated in the same chapter referred earlier, as under: The Second World War provided a fillip to the growth of corruption. It got an impetus in the post war flush of money and consequent inflation. The subsequent period from the Seventies witnessed the start of the era of political corruption and criminalization of politics, of conducting or allowing corruption in the electoral process using money power and with links between criminals and politicians resulted in the total demoralisation of our public lives. Despite all this, what little progress we make to produce eminence intellectuals in our society is solely on account of our ancient culture an d traditional family way of life. Today the good majority is dumb in public life. Many educated citizens do not even cast their franchise. Growing indiscipline prevailing at the business and industry adversely affect the entire society and set pace to all our present social problems. Engaged in commercial or industrial activities and dealing with vast resources, business enterprises as part of their activities build wide interactions with the government and public authorities. Prompted by greed and the desire for making quick or easy money, and possessed with vast resources garnered through black money hoarding, there is adequate scope for businessmen and industrialist in this environment to use corrupt ways of getting their things achieved. Corruption is fu elled by greed. It is an attempt to look for short cut means for getting quick money. Business and industry promote corruption and public service thrives as the beneficiary of this evil source of earnings. This phenomenon is well documented in Santhanam Co mmittee Report, as described below.
To cite a concrete example of the demoralisation has set in the country can be seen from the way the functioning of The Board for Industrial and Financial Reconstruction of sick industrial companies (special provisions) Act of 1985 is abused.
"The Board was set up 'with a view to securing the timely detection of sick and potentially sick companies owning undertakings and to identify and implement speedy ameliorative remedial measures. Sadly, as with everything above, the provisions of SICA were misused. Clever corporates to ward off winding up petitions and other legal cases pending against them, registered themselves with B IFR, so as to take shelter under section 22 of SICA, which provided a protective umbrella against those cases during period of such registration." (Source "Banking through the decades" by PSV Chari & PS Narasimhan published in "The Hindu Survey of Indian I ndustry 1999") It was intended to be brake to curb sickness, but it served as a powerful engine to generate more NPAs. Rightly bankers now demand the abolition of BIFR as one of the remedial measures for arresting further growth of NPAs.
The Turning Point - Impact of the Econ omic Reforms from 1991 onwards
Today government has divested much of the controls, quotas and permits. Quantitative import restrictions have been withdrawn and industrial -licensing systems has been liberalised to a very large extent. Inefficient public ent erprises boarding corrupt public servants are being dismantled progressively through the process of corporatisation of public enterprises. The era of maintaining contact men, liaison agents and frequent visits to Delhi for political leverage are things of the past. Internet has changed our life style. Information about every Government Department, Public Sector Corporation or Public Utility Services are on the world wide web at a click's distance at your desktop. Every citizen has an equal access to informa tion. This has provided remarkable transparency in our administration. On the other hand industry no longer is pampered and favoured through protective economy. There is free competition not merely at national level, but at the global level. Business and industry have to change their mindset. The environment that was breeding corruption is given a go bye. Tax laws are being simplified and rationalised. Enormous opportunities are invested to the new generation of our young men and women and made within reach through bonafide efforts. Be honest and find your way to excellence. It is within
our reach. Or act otherwise and get struck. The choice lies with us, and with each one of us. Reforms will have meaning, only when all of us reform our mindset. Industry has to compete at the global level and capital has to be sourced from large number of investors at the national or international level. Corporate governance and corporate ethics have become essential for business success and to infuse confidence with the sta keholders. The era of easy profits through questionable ways are now gone bye. At the Corporate level power and authority have to be decentralised. This is one of the objectives of corporate governance. Everyone must have sufficient power to play his effective role for the fulfilment of the corporate mission, and achievement of the accepted corporate goals.
[Excerpts from address by Deputy Governor (Shri G.P.Muniappan) at CII Banking Summit 2002 at Mumbai on April 1, 2002 ] "It is not Anymore Lenders' Problem alone but Equally that of Borrowers too! "The high level of NPAs in banks and financial institutions has been a matter of grave concern to the public as bank credit is the catalyst to the economic growth of the count ry and any bottleneck in the smooth flow of credit, one cause for which is the mounting NPAs, is bound to create adverse repercussions in the economy. NPAs are not therefore the concern of only lenders. I consider that forum like this, comprising of repres entatives of a major section of the beneficiaries of the financial system, should equally get concerned in a serious way on what they can do to address the gravity of the NPA problem of banks. I would rather urge them to lend a helping hand in the ongoing efforts of banks, and financial institutions to recover bad debts and arrest fresh accretions of NPAs.
Income should not be recognise d on NPAs on accrual basis but should be booked only when it is actually received in respect of such accounts. An asset is considered as "non -performing" if interest or instalments of principal due remain unpaid for more than 180 days (the lag would get r educed to 90 days from March 31, 2004 to conform to international norms). Any NPA would migrate from sub-standard to doubtful category after 18 months (as against 12 months under international norms). It would get classified as loss asset if it is irrecove rable or only marginally collectible. The banks should make full provision for loss assets, 100 per cent of the unsecured portion of the doubtful asset plus 20 to 50 per cent of the secured portion (depending on the period for which the account is doubtfu l), and a general 10% (it is 20 per cent under international norms) of the outstanding balance in respect of sub -standard assets."
"Detailed guidelines have been issued by RBI in October 2000 on valuation and provisioning for investment portfolio includin g credit substitutes"
y y y y
They erode current profits through provisioning requirements They result in red uced interest income They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future, and They limit recycling of funds, set in asset -liability mismatches, etc
There is at times a tendency among some of the banks to understate the level of NPAs in order to reduce the provisioning and boost up bottom lines. It would only postpone the < CBI and vigilance to management senior the subjecting besides internationally, cr edibility losing weak as branded getting like consequences, disastrous with banks of some in happened effect> In the context of crippling effect on a bank's operations in all spheres, asset quality has been placed as one of the most important parameters i n the measurement of a bank's performance under the CAMELS supervisory rating system of RBI.
Implications of NPAs - Supervisory action that may arise on account of high level of NPAs
"One of the trigger points in the proposed Prompt Corrective Action (PCA) mechanism [which was widely circulated by RBI through the public domain] is the level of net NPAs. When the trigger point under the mechanism is activated by the performance of a bank, the mandatory actions would follow by way of restriction on expansion of risk -weighted assets, submission and implementation of capital restoration plan, prior approval of RBI for opening of new branches and new lines of business, pa ying off costly deposits and special drive to reduce the stock of NPAs, review of loan policy, etc.
Other implications "The most important business implication of the NPAs is that it leads to the credit risk management assuming priority over other aspects of bank's functioning. The bank's whole machinery would thus be pre -occupied with recovery procedures rather than concentrating on expanding business. "As already mentioned earlier, a bank with high level of NPAs would be forced to incur carrying costs on a non-income yielding assets. Other consequences would be reduction in interest income, high level of provisioning, stress on profitability and capital adequacy, gradual decline in ability to meet steady increase in cost, increased pressure on net interest margin (NIM) thereby reducing competitiveness, steady erosion of capital resources and increased difficulty in augmenting capital resources. "The lesser appreciated implications are reputational risks arising out of greater disclosures on quantum and move ment of NPAs, provisions etc. The non -quantifiable implications can be psychological like 'play safe' attitude and risk aversion, lower morale and disinclination to take decisions at all levels of staff in the bank.
Management of NPAs
"The quality and perf ormance of advances have a direct bearing on the profitability and viability of banks. Despite an efficient credit appraisal and disbursement mechanism, problems can still arise due to various factors. The essential component of a sound NPA management system is quick identification of non -performing advances, their containment at minimum levels and ensuring that their impingement on the financials is minimum. "The approach to NPA management has to be multi -pronged, calling for different strategies at different stages a credit facility passes through. RBI's guidelines to banks (issued in 1999) on Risk Management Systems outline the strategies to be followed for efficient management of credit portfolio. I would like to touch upon a few essential aspects of NPA management in this paper. Excessive reliance on collateral has led Indian banks nowhere except to long drawn out litigation and hence it should not be sole criterion for sanction. Sanctions above certain limits should be through Committee which can assume the status of an 'Approval Grid'. "It is common to find banks running after the same borrower/borrower groups as we see from the spate of requests for considering proposals to lend beyond the prescribed exposure limits. I would like to caution that runnin g after niche segment may be fine in the short run but is equally fraught with risk. Banks should rather manage within the appropriate exposure limits. A linkage to net owned funds also needs to be developed to control high leverages at borrower level. "Exchange of credit information among banks would be of immense help to them to avoid possible NPAs. There is no substitute for critical management information system and market intelligence. We have come across cases of excellent appraisal and compliance wit h sanction procedures but no control at disbursement stage over compliance with the terms of sanction. To overcome this problem a mechanism for independent review of compliance with terms of sanction has to be put in place.
"Close monitoring of the account particularly the larger ones is the primary solution. Emerging weakness in profitability and liquidity, recessionary trends, recovery of instalments / interest with time lag, etc., should put the banks on caution. The objective should be to assess the liquidity of the borrower, both present and future prospects. Loan review mechanism is a tool to bring about qualitative improvement in credit administration. Banks should follow risk rating system to reveal the risk of lending. The risk -rating process should be different from regular loan renewal exercise and the exercise should be carried out at regular intervals. It is not enough for banks to aspire to become big players without being backed by development of internal rating models. This is going to be a pr e-requisite under the New Capital Adequacy framework and if a bank wants to be an international player, it shall have to go for such a system. "Banks should ensure that sanctioning of further credit facilities is done only at higher levels. A quick review of all documents originally obtained and their validity should be made. A phased programme of exit from the account should also be considered
"As regards internal factors leading to NPAs, the onus rests with the banks themselves. This calls for organisational restructuring, improvement in managerial efficiency, skill upgradation for proper assessment of creditworthiness and a change in the attitude of the banks towards legal action which is traditionally viewed as a measure of the last resort. These are the elements on the agenda of the second phase of reforms. [ Dr.Bimal Jalan, Governor, RBI, in a speech titled "Banking and Finance in the New Millennium." delivered at 22nd Bank Economists Conference, New Delhi,15th February, 2001]
The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. Banks are free to design and implement their own policies for recovery and write -off incorporating compromise and negotiated settlements with the approval of their Boards, particularly for old and unresolved cases falling under the NPA category. The policy framework suggested by RBI provides for setting up of an independent Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinise and recommend compromise proposals Specific guidelines were issued in May 1999 to public sector banks for one time non discretionary and non discriminatory settlement of NPAs of small sector. The scheme was operative up to September 30, 2000. [Public sector banks recovered Rs. 668 crore through compromise set tlement under this scheme.] Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001 helped the public sector banks to recover Rs. 2600 crore by September 2001]
An OTS Scheme covering advances of Rs.25000 and below continues to be in operation and guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister providing for OTS for advances up to Rs.50,000 in respect of NPAs of small/marginal farmers are being drawn up.
banks and FIs for recovery of their funds, as on 31st March every year. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. However, they serve as negative basket of steps shutting off fresh loans to these defaulters. I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers.
Legal Reforms
The Honourable Finance Minister in his recent budget speech has already announced the proposal for a comprehensive legislation on asset foreclosure and securitisation. Since enacted by way of Ordinance in June 2002 and passed by Parliament as an Act in December 2002.
Corporate Governance
A Consultative Group under the chairmanship of Dr. A.S. Ganguly was set up by the Reserve Bank to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis --vis compliance, transparency,
disclosures, audit committees etc. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and over -exposure. The Group is finalising its recommendations shortly and may come out with guidelines fo r effective control and supervision by bank boards over credit management and NPA prevention measures. The report of the group is given and discussed in another page.