BAD CHOICE Ris­ing non­per­form­ing as­sets (NPA), higher risk pro­vi­sion­ing as­signed to the real es­tate sec­tor by the Re­serve Bank of In­dia (RBI) and dwin­dling prof­its in the real es­tate sec­tor have made banks re­luc­tant to lend to the sec­tor

HT Estates - - FRONT PAGE - Nam­rata Kohli ht­es­tates@hin­dus­tan­

Ni­rav Modi, Ro­tomac, Jaypee In­frat­ech, Lanco In­frat­ech –fresh skele­tons keep tum­bling out of the closet of In­dia’s bank­ing sys­tem ev­ery other day. We hear of only hi-pro­file fi­nan­cial frauds but in­sid­ers re­veal how new cases are added by the day from the banks’ pan­dora box with con­struc­tion, ce­ment, steel, in­fras­truc­ture and real es­tate be­com­ing the in­creas­ingly most ‘avoid­able’ sec­tors.

Take the spe­cific case of real es­tate sec­tor. Ris­ing non-per­form­ing as­sets (NPA), higher risk pro­vi­sion­ing as­signed to the real es­tate sec­tor by the Re­serve Bank of In­dia (RBI) and dwin­dling prof­its in the real es­tate sec­tor have made banks re­luc­tant to lend to the sec­tor. Bank lend­ing to the real es­tate sec­tor has sig­nif­i­cantly dropped from over 57 per cent in 2010, to less than 24 per cent in 2016, ac­cord­ing to a re­cent re­port by KPMG. As a mat­ter of fact, PE (pri­vate eq­uity) funds and fi­nan­cial in­sti­tu­tions such as pen­sion funds andsovereign wealth funds have re­placed banks as the largest source of fund­ing to the real es­tate sec­tor, with their share up from 25 per cent in 2010 to 75 per cent in 2016.

Non-per­form­ing As­set has emerged over a decade as an alarm­ing threat to the bank­ing in­dus­try in our coun­try send­ing dis­tress­ing sig­nals on the sus­tain­abil­ity of not just the af­fected banks but the econ­omy in gen­eral. But why are some sec­tors low­est on the pre­ferred list es­pe­cially when they are key to the coun­try’s growth.

The­o­ret­i­cally speak­ing, grant­ing of credit for eco­nomic ac­tiv­i­ties is the prime duty of bank­ing sec­tor and trans­fer­ring of funds fromthesys­tem­to­wards pro­duc­tive pur­poses must be en­cour­aged as this spurs over­all de­vel­op­ment of the coun­try. How­ever lend­ing car­ries a risk called credit risk, which arises from the fail­ure of bor­rower and more so in sec­tors with long ges­ta­tion pe­riod, bad track record with stalled projects, which are deeply im­pacted by the slow­down in do­mes­tic and global econ­omy, lenders have to be cau­tious.

Non-re­cov­ery of loans along with in­ter­est forms a ma­jor hur­dle in the process of credit cy­cle. These loan losses af­fect the banks prof­itabil­ity on a large scale and an as­set is clas­si­fied as Non-per­form­ing As­set (NPA) if due in the form of prin­ci­pal and in­ter­est are not paid by the bor­rower for a pe­riod of 90 days.

Ac­cord­ing to Dr. Arun Singh, lead econ­o­mist at Dun & Brad­street, “In­dia’s bank­ing sys­tem is rid­den by debts but con­struc­tion and in­fras­truc­ture sec­tor ac­count for more than 30% of the prob­lem.”

He adds that these two sec­tors have been the prob­lem­atic sec­tors but the sit­u­a­tion is ex­pected to go from bad to worse in next one year. As a per­cent­age of GDP, NPA ra­tio stand at 10.9% as on March 2018 from 9.6% March 2017 and 10.2% in Sep 2017. But this will go up to 11.1% by Sep 2018 and the prob­lem is nu­mer­a­tor is run­ning faster than the de­nom­i­na­tor.

Till nowIn­dia’s NPAswas­bet­ter than many coun­tries but at 11.1% In­dia’s sit­u­a­tion will be worse than even Spain, Rus­sia, Ire­land. The other prob­lem in the mak­ing, says Dr Singh, is that while we are talk­ing about NPAs no one is fo­cussing on the is­sue of stressed as­sets. If the num­ber on Sep 2017 was 10.2%, by fac­tor­ing in the stressed as­sets it was 12.3%. The ra­tio is ex­pected to be­come 13.5% by Sep 2018 and this will even­tu­ally come to the NPA fold and the ra­tio is set to in­crease.

The prob­lem is con­spic­u­ous es­pe­cially in the case of state owned banks.

Ac­cord­ing to data from RBI, the gross NPA of pub­lic sec­tor and pri­vate sec­tor banks as on Septem­ber 30, 2017 were Rs 7,33,974 crore and Rs 1,02,808 crore, re­spec­tively. Among the ma­jor gov­ern­ment- owned banks, State Bank of In­dia had the high­est level of NPAs at over Rs 1.86 lakh crore, fol­lowed by Pun­jab Na­tional Bank (Rs 57,630 crore).

The fact that Pub­lic sec­tor banks have much higher NPAs than their pri­vate coun­ter­parts puts a ques­tion mark on the scru­tiny, due dili­gence or the lack of it.

Ex­perts be­lieve that those coun­tries that were able to make an eco­nomic turn­around postre­ces­sion, were the ones who were able to fix their bank­ing sys­tems. Says Dr Arun Singh

if there was one thing that GoI should do to fix the econ­omy is to fix the large bor­row­ers and be harsh on each de­faulter case. It will help to do some ex­am­ple set­ting and send out a strong mes­sage.

These large bor­row­ers have very good doc­u­men­ta­tion but they are tak­ing ben­e­fit of ad­vanced in­stru­ment such as lines of credit etc. It is not that they do not have ca­pac­ity for re­pay­ment­but­most­lyit’s aprob­lem of cir­cum­vent­ing.”

The sil­ver lin­ing on the cloud is the com­ing of a num­ber of newer reg­u­la­tions and strin­gent laws such as In­sol­vency and Bank­ruptcy Code (IBC), Be­nami transactions Act, link­ing of aad­har to bank ac­count and the gen­eral push to­wards dig­i­tal econ­omy.

All this is ex­pected to make things more trans­par­ent in the fu­ture. “IBC has the po­ten­tial of be­ing a game changer”, says Su­mant Ba­tra, In­dia’s lead­ing In­sol­vency lawyer who was work­ing in the Jaypee In­frat­ech case, when IDBI Bank moved Na­tional Com­pany Law Tri­bunal (NCLT) for in­sol­vency pro­ceed­ings against Jaypee In­frat­ech for de­fault of a loan of about Rs 526 crore.

Adds Ba­tra- “We can ex­pect the green shoots to­wards the be­gin­ning of the next year by when we can see clo­sure in large NPA cases with lit­i­ga­tion re­solved and clar­ity on grey ar­eas in IBC. This year will still be tur­bu­lent for IBC cases but the dust will start set­tling soon. As long as the gov­ern­ment does not re­spond in a knee jerk man­ner to the mo­men­tary ups and downs IBC will sail through rough weather. Pay­ments un­der many big ticket res­o­lu­tion plans will cre­ate liq­uid­ity for banks and re­store con­fi­dence in bank­ing sys­tem and re­sume lend­ing. 2019 is the year to watch out.” But why does he call it a knee jerk re­ac­tion?

He feels that pol­icy changes have to be thought through care­fully to un­der­stand their long term im­pli­ca­tions.

In­tro­duc­tion of sec­tion 29A was a knee jerk re­ac­tion by the gov­ern­ment. Nowhereel­seinthe world pro­mot­ers are barred from par­tic­i­pat­ing in the res­o­lu­tion process. Just be­cause some pro­mot­ers have been dis­hon­est the en­tire class of en­trepreneurs can­not be pe­nalised.

Sim­i­larly, just be­cause NCLT has de­cided en­force­ment of per­sonal guar­an­tees is cov­ered by the mora­to­rium, the gov­ern­ment has de­cided to amend the law to ex­clude per­sonal guar­an­tees.

Growth of the right kind is al­ways pre­ferred but when it comes to NPAs, are we still in the growth phase or have things sta­bilised. PNB, which has been un­der the scan­ner, gets the last word.

PNB thinks NPAs have plateaued and recog­ni­tion and iden­ti­fi­ca­tion of NPAs is al­most com­plete, now the fo­cus is on res­o­lu­tion and any in­cre­men­tal NPAs would be mo­men­tary. They feel in the near term the pos­i­tives like uptick in eco­nomic growth, ris­ing cor­po­rate prof­itabil­ity, faster res­o­lu­tion un­der IBC will lead to de­cline in NPAs. Con­sid­er­ing the mag­ni­tude of NPA prob­lem PNB thinks there can­not be quick fix so­lu­tion and res­o­lu­tion but for sys­tem as a whole NPA man­age­ment in our coun­try is mov­ing to­wards res­o­lu­tion at a faster pace.


Non­re­cov­ery of loans along with in­ter­est forms a ma­jor hur­dle in the process of credit cy­cle

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