What RBI's NPA move really mean: Govt control on banks should go

If you were wondering why public sector banks have higher NPAs than their private sector counterparts, a report in The Economic Times today may give you an answer.

According to the report, often the loan sanctioning process in a state-owned bank involves just one step-phone call from a senior official to a junior staff, says the report.

The Indian Banks’ Association has urged banks to take steps to stop such practices, the report says.

“During some vigilance complaints it was reported that loans were initially sanctioned on verbal orders. This had led to discrepancy as junior officers had claimed that they had sanctioned loans after receiving orders to expedite the case from senior authorities,” a senior government official has been quoted as saying in the report.

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No wonder, there has been an alarming rise in bank NPAs. According to the finance ministry data, gross NPAs of public sector banks had declined to 2.09 percent in 2008-09 from 14 percent in 2000. Ever since, the figure has again been rising. As of June, the gross NPA of nationalised banks was nearly 4 percent-Rs 1.92 lakh crore. This is a steady increase from Rs 1.64 lakh crore in March.

More alarming is the increase in bad loans restructuring, an exercise that dress them up like a performing asset. According to the RBI data, in 2012-13 the number of loans restructured under corporate debt restructuring mechanism rose 37 percent. The amount restructured thus surged 52 percent.

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The authorities are slowly but surely waking up to the reality. A report in the Business Standard says the Reserve Bank of India is planning to put in place new norms to help banks spot non-performing assets early on and deal with them.

The report says the RBI will force banks to profile a borrower at the very first instance of a default. Further, a panel of lenders’ consortium will vet decisions taken on loans of Rs 100 crore or more. This move is expected to curb restructuring. Another step being considered is giving incentives to banks which identify potential NPAs early on.

The norms being mulled are pre-emptive in nature. They are aimed at encouraging banks to spot an NPA early on and taking necessary measures.

But that is not all. They also have pointers to the government.

As is evident from the instances mentioned in the ET report, the increase in non-performing assets in public sector banks is also a fallout of the bad governance, stemming from the government’s excessive control over them.

The senior official who coerces the junior staff to sanction a loan might as well be acting on the behest of a political boss. It is crony capitalism at its best.

The government’s control over banks has adverse impact not only on their governance. They take a toll on their business too. How many times have the finance minister pushed banks to cut interest rates even though the interest rates in the economy are on an upmove?

Moreover, as Firstpost’s R Jagannathan argues in this article , the government’s firm grip on its banks is killing innovation in the banking sector.

“…Government ownership is the biggest barrier to innovation. It is impacting the pace of innovation even in private sector banks because competition is weak from public sector banks.”

If the authorities are serious about bringing down the NPAs, they should first bring down the government’s control over banks.

It would be good if the government remembers what Raghuram Rajan said about wilful defaulters.

“Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures.”