How Can You Effectively Manage NPAs?

Management of  NPA (Non Performing Assets) - New suggestion - An old wine in new bottle

Recently Mr. Piyush Goyal, Finance Minister, announced setting up of a committee to give recommendations in two weeks on formation of an asset reconstruction company for faster resolution of stressed assets besides mooting the idea of 'BAD BANK'. Further, banks also will consider 'having oversight committees with external experts to help faster resolution of stressed accounts.' Is not the finance minister’s assertion a confirmation that the present ARCs or AMCs and the actions so far initiated in the matter of recovery of NPAs have failed to resolve the stressed accounts faster?

The Minister while announcing decisions to resolve the NPA crisis did not dwell with the reasons for ineffectiveness of the existing system and procedures in the matter of recovery of NPA and the functioning of the existing ARCs and AMCs and how the new creations are going to resolve NPA problems speedily. Creating another ARC / AMC or group of outside experts or starting a new 'BAD BANK' is nothing but pouring an old wine in a new bottle and will not be a panacea of all ills found in the present system for the speedy recovery and faster resolution of NPAs. What is required is a definite attitude change towards recovery of debts by banks and financial institutions based on the harsh realities of the prevailing situations at the ground level.  

There exists a trust deficit between the banker and the borrower. If only they can understand their respective roles and duties and responsibilities and how are they interconnected with their mutual welfare in their correct perspectives, then only can there be an everlasting enduring and endearing relationship. Considering the interdependent nature of the relationship between the banker and the borrower, any action taken either by the bank in sanctioning of the loan and its recovery or any action by the borrower which affects the contribution to the society and the recovery process by the bank, is detrimental to their respective functioning, will badly affect the economy of the nation and welfare of the stake holders.  Hence, the reliance on each other should be understood first. 'Understanding is the first step to acceptance, and only with acceptance can there be recovery.'

What is advocated now is a total change in the attitude and approach to recovery of dues by the banks and the borrowers. Since attitude of the bank to lend and recover the dues, and the approach of the borrower with regard to utilization of funds received by way of loan and payment of dues determine the result of lending.  The basic rule is to fix the problems and find solutions.  There are two types of problems namely the internal problems of the banks and the borrowers respectively as the case may be which are within their individual domain and under their control and the other problems are external over which none have any control. Thus it is very important to recognize the cause of the problems to find solutions which is almost nonexistent now that creates the most important impediment in the case of NP resolution.

The case of willful defaulter is to be treated differently and with a firm resolve without showing any mercy if they proved to be really willful defaulter. Therefore, it is imperative that there should be a definite distinction made between honest borrower with integrity and willful defaulter. This distinction should be made objectively and subjectively taking into account the human sensitivity. Expediency should not be a policy to declare a borrower under a willful defaulter category who has a long association with the bank or financial institution who has been doing well but who becomes a defaulter due to circumstances beyond his control.   In the prevailing situation the banks do not make any distinction between a willful defaulter and a defaulter who is the victim of circumstances beyond his control and many times the banks become a passive on looker to a deteriorating circumstance. But both of them are treated at par. This is where the problem lies.

RBI, as regulatory authority, issues circulars from time to time on banking norms and system and procedures to be implemented by banks and financial institutions which are mandatory for them to comply with. Non compliance of RBI guidelines by any bank / F.I official is individually punishable under Banking Regulation Act. For the effective management of NPA accounts the following steps are necessarily to be initiated.

1. 'Prevention is better than cure.' At the outset the banks should undertake actions as per RBI guidelines on Prevention of slippage of NPA accounts and those banks who fail to take such steps should be penalized for their non compliance of RBI directions. Forensic audit is to be initiated wherever found necessary.
2.  Identify whether the borrower is a willful defaulter beyond any doubt and having declared as willful defaulter, stringent action should be taken since such borrowers do not deserve any remedy.
3. If the defaulter is a victim of circumstances beyond his control, then identify of such circumstances and analyze the reasons and based on the findings appropriate steps are to be taken to arrest the trend and initiate remedial measures by following RBI direction on Resolution of Stressed Assets and Corrective Action Plan with constant and continuous monitoring and follow up without complacency and letup involving the borrower also.
4. Banks and financial institutions should be allowed to take their own decisions without fear or favour which will serve them the best. The prevailing 'FEAR PSYCHOSIS' should be removed so that the bank officials can take bold decisions.
5. A well and specially trained knowledgeable and inspired work force of all categories of employees is to be created at all levels to deal effectively with NPA accounts.
6. A customer education and awareness programme should be initiated and conducted regularly regarding law and practice of banking and the importance of keeping their accounts in good health. Bank officials from top to bottom should spend quality time with their customers periodically particularly with borrowers to understand their problems and predicaments to find solutions with the involvement of customers / borrowers.
7. Compulsory periodical review of performance, audit and study on credit sanction and monitoring by competent and knowledgeable professionals and if necessary with the help of outside competent experts in the field are to be undertaken for large accounts particularly coming under infrastructure, power and other core industries with the participation of the borrowers to take remedial measures, if required, without delay within a time frame.
8. If all means of restructuring / rehabilitation fail, then alone legal steps are to be initiated for the recovery of debts. Recovery measures should not be an infringement into the fundamental rights and human rights of the stake holders.  It should be made with a human touch taking into account the sensitive issues involved in it.

The basic principle is that it takes time to construct but it takes no time to destroy. The policy of 'MAKE IN INDIA' should not be allowed to be obliterated in the process of recovery being adopted now. In this connection the recent judgment of the Supreme Court may be recalled which states that restructuring / rehabilitation takes precedence over recovery. Any process of recovery undertaken should culminate in a win-win situation for both the lender and the borrower contributing to the economic health and wealth of the nation.