XXXX
T
M K Verma
Director,
Moneyy Maxx Finance Services
Pvt. Ltd., Mumbai,
Maharashtra, India.
E-mail: mkverma47@yahoo.co.in
The article analyzes the
internal and external factors
that led to the rise in NPAs
in the course of asset
creation by the banks in
India. It also suggests
various measures to be
adopted by the banks and
regulators to restrict the
increase in NPAs.
©1 2018 IUP. All Rights Reserved.
4_Growing NPAs_MM_RU_VIyengar.pmd 1 16-04-2018, 14:41
he level of NPAs in the Indian
banking system is pegged at
about 10 lakh cr
representing about 10.5% of gross
advances and the stressed assets are
about 11.5 lakh cr which is around
14% of the gross advances. The
estimates of some agencies indicate
the gross NPA level is most likely to
increase in the coming future as RBI
is scrutinizing each and every bank
because of the latest PNB Scam.
These NPAs and bad loans need to be
attended to and shaped up so that it
does not become a liability for the
banking system and the economy.
To strengthen the soundness
and stability of the banking system
as per international standards,
BASEL norms were adopted by
India w.e.f. from April 1, 1992.
Capi tal fund was clearly
demarcated into Tier I and Tier II.
In addition, to strengthen the
capital composition of banks, a
buffer of 2.5% was added bringing
the norm to 11.50% of the risk
weighted assets. India intended to
implement Basel III norms by
March 2018, but further delayed to
March 2019.
Since there is high rise in NPA,
the capital infusion of nearing the
incremental equity requirement in
the Indian banking system may go
up to as high as 3.2-4 tn over the
next six years.
To arrest the rise in NPA and to
recover the bad debts of the banks, it
is urgently required to formulate fast
recovery steps as it will not only eat
into the banking system but also
plague the growing Indian economy
and will become a major obstacle for
the economy which is poised for a
great leap.
From the position of 10th ranking
in the world pertaining to NPA,
India is now ranked as the fifth
largest NPA nation across the globe.
Among the industries in India, the
following account for most of the
NPA: steel, power, telecom,
infrastructure and textile.
Reasons for Rising NPA in India
Even though many steps have been
taken by RBI and Government of
India to check the rise in NPA, the
fallouts are increasing quarter-on-
quarter basis. It has been observed
that there are inherent internal
and external fac to rs wit h the
bor rowers and the le nding
institutions which have not been
attended to properly. Some of the
factors are listed below.
Internal Factors
• Misuse of the borrowed fund for
other purposes than it was
mentioned in the contract.
• Laxity in credit risk appraisal,
loan monitoring in banks.
• Business failures
Please
• Relaxed lending norms check
especially for corporates.
• No contingency plans by banks
to mitigate the project risk.
• Mismanagement: Temptation
towards bribe and illgotten
money; posting of officers not
having good character and
credentials at sensitive places.
April 2018
 Growing NPAs: Reasons and Steps to Mitigate

• Delay in Disbursement: There
are occasions when even after
proper assessment of the project
the delay in disbursement by the
banks due to administrative and
internal issues results in the
project becoming unviable, thus
leading to NPA.
• Diversion of Funds: Due to lack
of control and monitoring by the
banks, the promoters
intentionally try to divert funds
to other sectors or for personal
use.
• Instead of solving the cash
crunch and delayed cash flow of
the companies, restructuring of
loan had been undertaken by the
In order to reduce NPA and resolve
banks lately. Almost 90% of the
the issue, the Government of India
restructured loans have become
pass ed legislation and acts
NPA as it was not well matched
cont inuousl y to r egulate the
with the future cash flow.
In case of government loans, especially
agricultural loans, which are not backed by any the steps taken
security, there is a general impression that if are as follows:
not paid, it will be written off
• Companies with high exposure
to debts were further helped by
the banks to come out of the
crisis, leading to further addition
of NPA.
External Factors
• Business losses due to changes in
business/regulatory
environment.
• In case of government loans,
especially agricultural loans,
which are not backed by any
security, there is a general
impression that if not paid, it will
be written off.
• The global slowdown of economy
has related effect on international
trade and thus further decline in
export which has tended to add to
the woes of NPA.
• Severe competition in any
particular market segment. For
example, telecom sector in India.
• Delay in implementation of
projects due to social, political
and cultural issues.
• Non-implementation of trade
barrier. Cheap import due to
dumping leads to business loss to
domestic companies; for example,
steel sector in India.
Steps Taken by Government to
Reduce NPA
functioning of
the Ind ian
b a n k i n g
sys tem. The
Acts passed and
Lok Adalat –
2001
Lok adalat bill
was passed to resolve the disputes
through mediation. “Lok Adalat” is
defined as a “forum where voluntary
effort aimed at bringing about
settlement of disputes between the
parties is made through conciliatory
and pervasive efforts”.
Due to delay in legal redressal
and cost, the bill was passed to help
bankers resolve their issues in front
of a quasi-judicial body appointed by
RBI. However it could not solve the
issues and many cases ended
unresolved as offences were non-
compoundable.
Sarfaesi Act – 20
This Act introduced major changes
in the legal framework for the
recovery of dues by laying hands on
the securities. The Act is a major
step in financial sector reforms.
It has brought a legal framework
for the following important activities
in the credit market: securitization
of financial assets and
reconstruction of financial assets.
Under the Sarfaesi Act, a secured
creditor can enforce the security
interest created in his favor without
the intervention of the Court or
Tribunal.
Asset Reconstruction Companies
Asset Reconstruction Companies
(ARCs) are nothing but external ‘bad
banks’. In theory, banks with a large
proportion of bad debts or NPAs can
sell these to a legally separate ARC,
which then recovers whatever it can
through attachment, foreclosure or
liquidation. The bank enjoys the
benefits of a relatively ‘clean’ asset
book; and if the transfer prices of the
NPAs are low enough, the ARC also
ends up making a profit.
Joint Lenders Forum – 2014
As per RBI notifications, banks are
advised that as soon as an account is
reported by any of the lenders to
CRILC as SMA-2, they should
mandatorily form a committee to be
called Joint Lenders’ Forum (JLF) if
the Aggregate Exposure (AE) [fund
based and non-fund based taken
together] of lenders in that account is
1000 mn and above. Lenders also
have the option of forming a JLF
even when the AE in an account is
less than 1000 mn and/or when the
account is reported as SMA-0 or
SMA-1.
The JLF may explore various
options to resolve the stress in the
account. The intention is not to
encourage a particular resolution
option, e.g. restructuring or
recovery, but to arrive at an early
and feasible solution to preserve the
economic value of the underlying
assets as well as the lenders’ loans.
The options under Corrective Action

Portfolio Organizer 2

4_Growing NPAs_MM_RU_VIyengar.pmd 2 16-04-2018, 14:41


Plan (CAP) by the JLF include shares based on the cash flow of the
rectification, restructuring and firm. This helped banks recover
recovery. fast.
5:25 Rule – 2014 Mission Indradhanush- 2015
Also known as flexible structuring of Mission Indradhanush was
long term project loans to introduced by RBI to streamline
infrastructure and core industries. their functioning and to reduce the
Earlier term loans to large projects NPA, and also to smoothen the
had a limited repayment period of functioning of the banks and make
maximum 10 to 12 years which was them more accountable.
never well matched with the cash
flow of the organization. This become Insolvency and Bankruptcy Code,
a strain on the companies and due to 2016
Please any issue involved the account use to
check get stressed. This law was passed by the
government to reduce the time and
RBI came out with the concept of cost of the insolvency process. Before
5:25, meaning that any loan above this law was passed, the insolvency
500 cr will have a repayment period process was very time-consuming
of 25 years and after every five years and costly. It was very difficult to
it will be reset based on the cash flow liquidate the assets then. After this
of the company. law was passed, it takes only 180-270
days for
companies and
LLPs and 90-
135 days for
individuals and
Mission Indradhanush 2015 was launched
small-scale
to streamline the functioning
firms to
of public sector banks complete the
insolvency
process. Under
this, two major
tribunals were established:
With this, many infrastructure
companies got a new lease of life and 1. National Company Law Tribunal
accounts became viable. (NCLT): This was established to
look after the companies and
Strategic Debt Restructuring LLPs bankruptcy.
(SDR) - 2015
2. Debt Recovery Tribunal (DRT):
SDR scheme was implemented in This was established to look after
June, 2015. As the name suggests, the insolvency and bankruptcy of
it is the restructuring of the terms individual and partnership firms.
and conditions of the loans. If any
company is having difficulties in
Fugitive Economic Offenders Bill
paying back the loan, the banks – 2017
give them an option to reduce the The draft Fugitive Economic
interest rate or to increase the Offenders Bill, 2017 was passed
tenure of the loan so that they are recently in the backdrop of top
more comfortable in paying back defaulters such as Nirav Modi, Vijay
and banks can get their money. In Mallaya and others who left the
some cases, banks even can buy the country. A person who has an arrest
stakes in the defaulting company by warrant issued in respect of a
converting the debts into equity scheduled offence and who leaves or
3 April 2018
4_Growing NPAs_MM_RU_VIyengar.pmd 3 16-04-2018, 14:41
XXXX
has left India so as to avoid criminal
prosecution, or refuses to return to
India to face criminal prosecution is
to be declared as ‘Fugitive Economic
Offender’.
This act when implemented will
empower the government to
confiscate any property in India
owned by economic offenders and
defaulters who flee India.
• Also, at the discretion of any
court, such person or any
company where he is a promoter
or key managerial personnel or
majority shareholder, may be
disentitled from bringing forward
or defending any civil claim.
• The proposed law will be
applicable in cases where the
value of offence is over 100 cr.
Recommendations and
Suggestions
Even though the government with
the help of RBI has been
continuously trying to reduce the
NPAs in India, due to some reason it
had not been successful. In order to
reduce NPAs and to have control
over the banking system so that
scams like the recent PNB Nirav
Modi Scam and SBI Scam do not
take place, RBI needs to understand
the facts more clearly.
It is not just the external factors
that are responsible for increasing
NPA; some internal factors like lack
of proper employees and professionals
in the banking sector are also highly
responsible.
It was banks’ fault that they were
not able to identify the right business
houses and their motives by deep
analysis, proper risk assessment and
corporate governance to identify the
prospective frauds.
Given below are some
suggestions which, if implemented,
will surely contain further slippage
and will stabilize the banking
system in India:
 Growing NPAs: Reasons and Steps to Mitigate
Proper Scrutiny of Proposal:
Due diligence, verification of CIBIL,
CERSAI and all the related portals
such as ROC and RBI along with
verification of applicants’
background along with technical and
financial appraisal is must.
HR Policy: The bank s ar e
organizations where the integrity
of staff is of utmost importance.
Hence their HR policy, right from
re crui tment to prom oti on and
rotation of staff every three years,
should be reviewed thoroughly.
Risk Rating: Banks need to
develop effective risk management
team to identify and get early
signals of impending danger and
should diligently design risk rating
model.
xxxxx (425 Words Filler Needed)
Portfolio Organizer
4_Growing NPAs_MM_RU_VIyengar.pmd 4 16-04-2018, 14:41
Efficient Management of
Working Capital Loans: A
substantial part of lending of all
banks is towards stock and debtors
which needs proper management
and follow-up. The chances of
diversion of funds are more in case of
working capital funds. Proper
verification of stock statement and
end use should always be monitored
by the lender.
Regulatory Control: Effective
corporate governance is the need of
the hour. The top management
nee ds t o des ign vi gil ant and
effe ct ive tr ans pare nt wor ki ng
system which has sufficient checks
and balances.
Corporate Governance: The
principles of corporate governance
should be effectively followed and
Source: xxxx
implemented in the banks by higher
echelons and top management.
Bank’s Apex Team Needs to
Monitor the Foreign Branch
Operations: Operation of Nostro,
Vostro and Loro Accounts should be
linked with core banking and should
have IT designed system to trigger
alert if any abnormal transaction
takes place. IT has already
revolutionized the banking system
and today we do major transactions
through net only. It is urgently
required to design a package by ITES
professionals to enable the bankers
to follow a stringent credit appraisal
system, follow-up system and early
recovery mechanism system so that
there is no further increase in
NPA.
Reference # 6M-2018-04-xx-01
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