NPA s :Blame It On Lazy Lending and on the discarding of the Prakash Tandon Committee norm of maximum permissible bank finance -

 B W Rajeev Dubey30 Sep, 2014 19:58 IST


If I were to pin all of this down to one reason, 

it’s the discarding of the Prakash Tandon Committee norm

 of maximum permissible bank finance 

There is one lot in the Indian banking industry that believes we have an impregnable banking system: that its robustness helped us escape unscathed when the developed world’s banking system collapsed in 2008; that despite the growing levels of non-performing assets (NPA) on the books of most Indian banks, they are not half as vulnerable as they are made out to be.

 

But there is another lot that is convinced about the impending crisis in Indian banking — thanks to the slowdown-induced industrial sickness across sectors such as power, aviation and steel. For 10 years, banks were competing with each other to lend. Corporates over-reached in raising debt. Lending norms were given the short shrift; and now, years of lazy lending have landed Indian banks in one of their biggest crises ever. Nearly Rs 4,30,000 crore worth of bad loans have already been referred to the corporate debt restructuring (CDR) cell as of June 30 this year.

 

For larger banks such as State Bank of India, gross NPAs as on 31 March 2014 stood at Rs 61,605 crore. Naysayers point out that it’s less than 5 per cent of the loan book. Point taken, but it’s still a little over $10 billion! That’s something worth worrying about even for the largest banks in the world.

 

Kolkata-based United Bank of India has a smaller book but its gross NPAs at the end of the last fiscal were at an alarming 10.47 per cent. At least 23 of India’s 27 state-run banks have NPAs higher than 3 per cent — the level at which banking regulator Reserve Bank of India would have cracked the whip earlier.

 

If I were to pin all of this down to one reason, it’s the discarding of the Prakash Tandon Committee norm of maximum permissible bank finance — not less than 25 per cent of working capital should be equity or quasi equity. The norm implied a maximum debt:equity ratio of 3:1. It was dumped in the mid-90s. But again, it would be unfair to blame the absence of this clause for the current crisis. Clearly, processes within banks that were geared towards a restrictive regime didn’t catch up with the reforms. Rampant corruption among disbursing authorities made it worse.

 

BW’s avid bank watcher, senior associate editor Raghu Mohan, has put together this story in his inimitable style.

On another front, having delivered two damp squibs on the foreign investment front (PM Narendra Modi’s Japan visit and Chinese President Xi Jinping’s India visit), Modi heads out for the US. But even before he embarks on the journey, he is already on the back foot. First, having fought the elections on an ‘anti-FDI in retail’ plank, he is unable to accede to a key US demand to open up FDI in retail and e-tail. Second, rival Congress has managed to stall the Insurance Amendment Bill which he hoped to carry as a trophy to the US. Third, the civil nuclear liability law continues to be to the dislike of major US and international firms.

 

There are slim hopes of any business breakthrough with US President Barack Obama, who is already being called a lame-duck President despite two years of his term remaining. Senior editor Joe Mathew examines, in an interview, why American pharma continues to be inimical to Indian drug firms’ interests.

 

(This story was published in BW | Businessworld Issue Dated 20-10-2014)