At the end of March 2018, Indian banking had a non-performing asset (NPA) ratio of 11.5%. And it was expected to increase further in the next twelve months. All earlier methods of tackling rising NPAs had met with limited success, and the ratio kept on rising. There were many reasons responsible for the NPA crisis, including irrational exuberance in lending, slow growth, government foot-dragging on permissions, and outright fraud and malfeasance. There was a tacit opinion that the RBI itself was to blame for the asset quality review launched in 2015. It was like blaming the thermometer for a high fever. The AQR was nothing but a more thorough version of the regular annual inspection carried out by the RBI to verify whether banks were classifying their assets properly. This was particularly focused on large borrowers who were suspected of influencing the process of bad loan classification. Banks have an inherent bias to delay classifying loans as NPAs, as this requires high provisioning, leads to low profitability and hinders new loans. Borrowers also preferred restructuring of stressed assets to avoid NPA tag and penal interest rates. Hence various earlier schemes on debt restructuring (CDR, SDR, S4R) had limited success in resolving stressed assets. Furthermore, the interests of borrowers and lenders seemed to converge ‘down the road’. The RBI governor referred to this borrower-creditor nexus which was thwarting proper asset classification and resolution. Then came the infamous circular dated February 12, 2018, which introduced a new paradigm for dealing with stressed assets. All bad debts were to be restructured within 180 days, or automatically go into an insolvency process and referred to the National Company Law Tribunal, which was expected to result in a time-bound resolution. RBI thought it appropriate not to engage in debt restructuring now that the framework law has come into force. So if a borrower and lender are unable to resolve the debt within 180 days, it is referred to the NCLT. Of course, all hell broke loose and this radical policy was successfully challenged in the Supreme Court, which struck down the policy in April 2019. The top court said that the RBI has crossed its limits. It did not have the authority under current law to push all stressed assets and defaulters into bankruptcy en masse. So the RBI issued another slim circular in June 2019, giving wider discretion to lenders, doing away with the mandatory NCLT reference and easing restructured loans, even though a minority of creditors objected. Are. Are we then back to the old regime of ‘extension and hypocrisy’, or has the NPA situation improved? We don’t know yet.
The next two years were spent in the shadow of the pandemic, where tolerance and generosity were the order of the day. Economic growth accelerated, corporate profitability improved significantly, especially for large firms, and losses for many were reduced. Banks were recapitalized on a large scale and big-ticket mergers took place. And let’s not forget the high-profile arrests of bankers for fraud or collusion. All these could be the projected reasons for the NPA ratio to fall from 11.5% in March 2018 to 5.9% in March 2022. Banks are definitely looking healthier now.
But have we really solved the problem of NPAs? In December, the government told parliament that 11.17 trillion bad loans were written off in the last six years. Write-off does not mean that recovery stops. But this period of recovery was merely 1.3 trillion. Adding the write-off and recapitalization, the government would have pumped in about 10% of GDP to prop up the banks. It is the depositors and the tax payers who bear this burden.
As far as willful defaulters are concerned, they are on the rise. They have increased by 38% in the last two years. dues of willful defaulters 3.4 trillion to banks, of which the top 50 owe approx. 1 trillion. In the five years since 2017, the number of defaulters against whom cases have been filed has increased from 8,744 to 14,485. The concept of ‘willful defaulter’ was introduced in 1999, as someone who does not make payments despite having the ability, or who embezzles money or diverts it to some other use. When a bank applies this tag, that borrower is blacklisted and explicitly excluded from bank credit. Most have the Central Bureau of Investigation behind them or have criminal cases filed against them. But resolution and recovery is slow.
Then why are the banks not allowed to negotiate and settle the defaulters? This is the essence of the settlement solution announced recently by the Reserve Bank of India. The incentive for a bank is to cut down on bad debt and hopefully recover a large portion of it. The borrower gets out of the blacklist and can access bank credit after a cooling-off period.
While seemingly practical, it creates bad optics and harms credit discipline. There seems to be a reward for wrongdoing, as the willful defaulter is almost like a proclaimed offender. But perhaps the tag is too powerful a weapon in the hands of bankers. The apex court had also recently cautioned that banks cannot use this label without giving the borrower adequate opportunity of being heard in defence. It may be that RBI wants to soften the blow by offering an easy way out of the tag. Bank unions are opposing it. So the actual success of the haircut for willful defaulters may be quite limited, just as various loan restructuring options did not bring down NPAs.
The pendulum of India’s NPA policy keeps swinging between the rights of creditors and debtors. The negotiated settlement option is a slight swing to the latter.
Ajit Ranade is an economist from Pune.
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Updated: June 14, 2023, 11:54 PM IST