THE MENACE OF BAD LOANS

                                                         - MILAN K SINHA

Just after reviewing the quarterly performance of state-run banks, the union finance minister informed the media, 'Bad loans of PSU banks are expected to be slightly higher by March-end from a year earlier and banks have been asked to focus on recovery of bad loans, particularly large NPA accounts.'

There is no denying the fact that the biggest challenge facing the public sector banks is their ever growing NPA portfolio. In fact, bad loans of PSU banks rose by 28.5 per cent from Rs.1.83 lakh cr in March, 2013 to Rs. 2.36 lakh cr in September’13- within just two quarters. By all indications, it is going to be far worse by the end of this fiscal.

The matter assumes greater concern as it is reported that one of the Kolkata based PSU banks- United Bank of India has recorded huge surge in its NPA portfolio. In the September quarter, it had to make provision for NPA to the extent of Rs.987.35 cr which rose to Rs.1857.83 cr in the December’13 quarter. The bank’s gross NPA rose from 5.39%  to 10.82% during the same period. As a natural outcome, United Bank recorded a net loss of 1238 cr. in December'13 quarter. Its net worth has also registered substantial erosion and its capital adequacy ratio dropped to the floor level of 9%. 

But, how did it happen in the first place despite so much internal checks and balances; strict control and regular supervision by the RBI and also by other statutory authorities as per the law of the land? What is the efficacy of quarterly review mechanism being undertaken religiously by the ministry? 

Interestingly, yet very unfortunately, this is not the first case of its kind for any state-run bank. It does happen in almost all banks - both public and private in differing magnitude depending upon various factors contrary to the laid down norms of classifying an asset. To put it straight, all banks allow its top brass to influence, if not manipulate the asset recognition exercise to boost profit and show better bottom line performance. If we take a ten year span to see and analyze the balance sheet of any bank after taking over of the new CMD or CEO and the previous one of his or her predecessor, we can very well see large variation in both the figures of NPA as well as profit for obvious reasons.  

Industry watchers say that there is nothing unusual about this and it is also not without the know of regulator and the ministry  as almost every new incumbent to the top post faces this music of hidden NPAs and under reporting of bad loans  by the previous top management. 

Yes, a far more severe than what happened in United Bank's instant case did happen with Chennai based Indian Bank in early nineties. The entire banking industry was under attack from all corners during that period- ironically a period when the economic liberalization had started taking shape in this country. But, that was the period of manual banking, unlike today’s technology based CBS banking where everything is computerized and IT enabled. Moreover, United Bank of India too uses the same computer software named Finacle for accounting purposes as many other banks in India.

To put it in plain words, the prudential norms of asset classification and income recognition is not strictly complied by the banks in the country as per the laid down principles by maintaining a fair and transparent system. And most importantly, the follow up, monitoring and control mechanism of RBI and ministry have not been full proof and up to the mark to ensure early detection of irregularities for initiating timely and effective action to keep the banking sector always in good health.   

As always, I am keen to know what you think on this subject. Hence, request you to post Comments to share your views and experiences.

                  Will meet again with Open Mind. All the Best.
# Published in Indian Currents.org
# Do visit my site : milanksinha.com