NPAs: What Mint Road Thinks Or Doesn’t!

Just about everybody in this world has an opinion on dud loans. Here’s what Mint Road thinks of them.

“You must have experienced how many advises come your way if you suffer from an ailment. The situation here is not much different… everyone seems to have become wiser about the issue and has a prescription to offer. Some blame the patient, some the doctor and still others are blaming the procedure. So called expert opinions are being voiced about the credit appraisal process of banks, collateral availability, personal guarantee, staff accountability and so on,” says S.S. Mundra, deputy governor, Reserve Bank of India (RBI). His best line: “If all these prescriptions are followed, the outcome would be akin to a successful operation, but a dead patient. In other words, the lending process would freeze.”

It’s easy to suggest that Mint Road has had enough of those offering unsolicited advice. But that’s to miss the larger message here. Ever since RBI carried out a rigorous asset quality review, and asked banks to provide aggressively for dud loans — in the popular discourse, it is felt that all is bad with our banks.

The stress in the banking system has been evident since fiscal 2012. Stressed assets for the system as a whole went up sharply to 14.5 per cent at end-December 2015 from 9.8 per cent at end-March 2012. During the same period, the stressed assets for state-run banks spiked to 17.7 per cent (from 11 per cent). If you were to look at the Financial Stability Report (December 2011), it says that “an analysis of the growth rate (of non-performing assets) in the first half of 2011-12 at 25.5 per cent is more than triple the average growth rate of 7.4 per cent in the first-half years during 2006-2011”.

In a nutshell, Mint Road feels that as far banks go, the failings were: governance deficit, poor credit appraisal particularly in infra financing, faulty structuring in power sector agreements, weak risk management, chasing quick growth and to “pretend and extend” loans. As for India Inc. — it was a case of all debt, no equity; veiled corporate structures that impeded assessment by banks; and an obsession with higher growth and chasing profits.

You can do all the post-mortem you want. The harsh reality, according to Mundra is: “The extent of the weakness in the global economy being witnessed could have been avoided. It is probably because neither banks nor corporates resorted to preventive healthcare. I am sure everyone would emerge much wiser after enduring the pain and be circumspect in their approach and get a periodic check-up done so that they can stay healthy and live longer”.

The bottomline: India Inc. (and banks) will continue to be in the ICU for some time.