With the Reserve Bank of India tightening the noose around NPAs, borrowers seeking large loans can be expected to be more realistic in their project estimations as well as repayment commitments. Lenders, on the other hand, particularly the PSU banks will re-examine many of the existing practices and perhaps reinvent the wheel so that borrowers are fully aware of the consequences of failing to meet their repayment obligations.
The story so far
It is now common knowledge that some 12% of the assets figuring on the books of Indian Banks collectively represent stressed assets. In other words, banks get back only 88 of every 100 rupees that they lend. When monies advanced to a borrower fail to come back to the lender, it erodes the profitability of the lender and consequently, the shareholders.
Interestingly, private banks in India have significantly less NPAs and the bulk of it amounting to about 90% is on the books of our PSU banks.
Thankfully, the Reserve Bank of India has now come out with a slew of measures to stem the rot and usher in more accountability from the bankers. The practice of giving different names to these stressed assets and rotating them within the books has now come to an end. The banks now have to call a spade a spade.
Many readers might want to believe that the erstwhile Satyam Computers invented fudging in India. But, this is far from true. Nearly every large borrower in this country has resorted to fudging figures in one form or the other to delay or deny loan repayments to banks. Here is an interesting story to understand fudging from a different perspective.
Most large businesses in this country have enjoyed political patronage from the ruling party at the State and/or National headquarters. At some point or the other, the PSU banks come under pressure from their political bosses to extend some favors to industrialists/businesses nominated by them. Many PSU bankers would vouch, at least in private, how they were haunted by various ‘influencers’ during their career span.
Like you need evidence in a court of law, healthy figures are essential for a banker. There is no dearth of intelligent professionals who will draw up robust set of figures for any business, of course for a price. The cooked dish then becomes the basis for juicy loans that the borrower can enjoy with the conscious knowledge that he might never ever be repaying the loan.
There was an interesting story recently on how the biggies in India are merrily enjoying at the cost of the PSU banks.
Sectors such as infrastructure do need large loan funding. Given the current scenario on NPAs, lenders are more likely to huddle themselves into a cave, rather than come out and stick their neck out. So far, individuals at the borrowing companies as well as the lending institutions have managed to remain unscathed. But, with the emergence of a new era in stressed assets management, this could change.
Hopefully, the political and middlemen nexus that marred the Indian Banking industry would now take the back seat given the new dispensation from New Delhi as well as the Reserve Bank of India.
On the flip side, we might also see a fresh approach from banks to retail lending that could become more user- friendly for millions of Indians.