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The latest issue of BT dated 26th APRIL 2015 has an interesting cover story titled “DROWNING IN DEBT”.

Here is my response by way of a LETTER TO THE EDITOR.

Dear Sir,

This refers to your cover story “Drowning In Debt” (BT April 26th). The piece is indeed an eye-opener and if the present state of affairs and the trend of rising Non Performing Assets continues, it would not be out of place to comment that it looks like our banking sector is literally on the edge of a major financial disaster! Warning signals need to be kept in sight of and necessary strategies need to be planned and implemented without any further delay, if such a catastrophe is to be prevented.

With a view to moving towards international best practices and to ensure greater transparency, it had been decided to adopt the ‘90 days’ overdue’ norm for identification of NPAs, from the year ending March 31, 2004 from the earlier norm of “180 days”. After such a worrying experience of nearly eleven years, in 2015 it is perhaps necessary to reduce the norms to say 45 or 60 days for effective control. Non Performing Assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in such cases which mostly  results in massive write offs!

The issue of quality of assets of the banking system is of paramount importance, given that the future of banking will be to strike a balance between business and profit growth with prudential practices, which involves both maintaining capital and controlling the quality of assets.

Sometime in January 2014, RBI had offered some leeway to banks for early detection and resolution of bad loans. It had also diluted rules for accelerated provisioning it had proposed for non-performing accounts. Perhaps it is again necessary for a “Think Tank” to review the situation.

Further, the Government’s prescribed / mandated target of 40% of annual lending by all banks to priority sector, needs to be re-visited and overhauled. With the subject of financial inclusion being much debated these days, it indicates that the position may further worsen if exposure to priority sector increases to cater to the new borrowers under the subject.

All said and done, it is felt that much heart-burning over large accounts turning to NPAs, can be avoided by following some simple steps: 1. Proper and adequate study of projects, to be sure of their technical feasibility and economic viability, before taking a lending decision. 2. Ensuring meticulous compliance of all terms and conditions of sanction. 3. Carrying out regular and frequent post sanction physical inspections of all accounts by a dedicated team of staff. An element of “surprise” must be kept in such inspections/visits. 4. Regular follow-up and close monitoring of accounts by all banks and “staff shortage” should not be an excuse for not carrying out this meaningful exercise. 5. The present practice of usual Annual Review of all accounts, should be cut down to Quarterly Review, so that problems if any, can be detected timely and necessary corrective action taken.

Banks have referred total NPAs of Rs. 4,52,940 crores 647 companies to CRD Cell as of 31st December 2014. This is an indicator of the grave malady the sector is suffering from. Like good doctors, let the banks not treat the symptoms but to treat the disease itself so that further deterioration in the quality of assets, is nipped in the bud.


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