Monday, June 08, 2015

Damn! Sell in Distress: NPA fix or NPA facade?

Sudhir Raikar | Mumbai | June 08, 2015 14:09 IST
The current NPA scene raises umpteen questions about the quality and effectiveness of banking governance and regulation. Unless they are voiced with the conviction they demand, every RBI intervention will always seem more palliative than curative.


Dealing with doubtful and distressed assets has always been the Achilles Heel of the banking sector. Barring the few players known for their stringent lending norms, most bankers try and downplay the whole issue through the usual philosophical sermon: That NPAs are an integral part of banking given the criticality of broad-based operations to profitability which exposes banks to all kinds of unavoidable factors like economic downturns and political upheavals. So, they claim, even the safest of loans can be rendered unproductive…

High time we stop hiding behind these lame excuses and collectively address some tough questions that make NPAs more elusive than what meets the eye:

How many banks have the courage to denounce and defy political pressures?

How many have dared to expose the conniving linkages between sanctioning authorities and scheming promoters as also the vote bank politics of debt waivers?

How many question the bizarre financial costs and benefits that make promoter projections look unbelievably lucrative?

How many exercise the indispensable ruthlessness in the murky area of farm loan recovery?

How many make risk assessment the focal point of provisioning norms?

How many demonstrate the will and intent to adopt dynamic provisioning – whether pure dynamic or conservative dynamic - to safeguard their profitability from sudden economic downturns?

When will the government evaluate the quality of bank audits for their effectiveness in questioning asset quality and valuation at an early stage?

Asset reconstruction companies (ARCs), born by virtue of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) are, in principle, meant to help lenders strengthen their loan recoveries free of court intervention that took years to materialize if it ever did.

But have they really worked in practice? If we consider the rapid increase in stressed assets even in the ARC regime, the answer doesn’t seem to be in the affirmative.

For ARCs to do justice to their stated job of buying distressed assets, their regulation should be obviously minimal. After all, their very purpose was to circumvent the problems emanating from the widespread abuse in the name of consumer protection that helped influential borrowers get away with every default by design.

But are the ARCs allowed the fundamental corporate freedom to deliver their stated objectives?

How effective are the debt recovery tribunals as also the enforcement of security interest under the SARFAESI Act?

Is granting mere ARC empowerment to take over management of errant entities enough?

Are ARCs equipped with the talent and acumen to manage the daunting restructuring process following the takeover? Given the fact that they can’t access foreign markets for funds or talent, they are already strapped of the necessary wherewithal to execute their job with conviction.

If the whole idea behind ARCs was to resolve the NPA crisis, why were the operational guidelines issued in a phased manner – those governing crucial powers like collateral seizure, payment settlement and reschedule and debt-to-equity conversions?

This is like saying – Yes, grab a bite but wait...there’re a few teething issues…

Why should ARCs be deprived of the facilitating mechanisms and exemptions granted to banks for individual asset and Corporate Debt restructuring?

Given the constraints within which ARCs operate, it’s hardly a surprise that many among them seem content with the assured annual fees from the sellers of distressed assets. Asset resolution is obviously rendered beside the point in this circumstantial marriage of convenience as the NPA masquerades as a Security Receipt investment, the risk remains where it was. Sadly, these arrangements can’t be questioned, perfectly legal that they are.

There’s no doubt that more RBI enactments would follow in the time to come. But unless we turn our attention to the fundamental questions surrounding the murky issue of NPAs, every RBI intervention will always seem more palliative than curative.

RBI chief Raghuram Rajan, in one of his recent media observations made a pertinent point: that the emergence of new players in the banking sphere will create a competitive force that would keep banks on their toes and also see the creation of many differentiated products.

Hope the new wave ushers in an environment of proactive prudence that penalizes banks and auditors for suspect motives that serve as a green house for NPAs. This way, banks, ARCs and their regulators would be left to deal only with the genuine cases of NPAs. For the Indian banking sector, that would a big leap forward indeed! - See more at: