One of the highlights of the BANCON held in Mumbai was the verbal assault launched on banks' non-performing assets (NPAs) by RBI, quite clearly out of exasperation. This is a continuation of the point made forcefully by the Governor of RBI when he took over. There are actually two parts to this sordid development. The first is that NPAs have been increasing and that something has to be done by banks quite seriously. The second is the growing phenomenon of debt restructuring, which in a way can be termed an euphemism for the same, padded up to look different. In the olden days, this used to be called ever-greening when banks overlooked NPAs by giving fresh loans. Critics aver that Corporate Debt Restructuring (CDR) is similar in direction though the mechanism is different.
To begin with, let us look at the conventional definition of NPAs. Ever since the economy started slipping, companies have found it difficult to service their loans leading to NPAs' volume increasing from 2.4% in FY11 to 3.0% in FY12 and around 3.6% in FY13. In absolute numbers, they stood at around R1.9 lakh crore in March 2013. The usual reasons are high interest rates and low corporate performance due to pressure on sales and costs resulting in inability to repay loans or service interest payments. One may assume that there is less of mala fide intent and that the ‘wilful defaulters’ category is not predominant.
The restructuring story is even more interesting. The CDR website shows that the volume of restructured debt has increased continuously, touching R2.72 lakh crore as of September 2013 from R0.9 lakh crore in FY09, and was at R2.29 lakh crore by March 2013. In terms of a ratio as a percentage of total advances, CDR was higher at 4.4%, and even traditionally this ratio has been higher than the declared gross NPA ratio.
The argument given in favour of CDR is that loans have to be restructured when the project cannot take off due to extraneous conditions. We all know that several projects are held up when the government’s policy changes or the government does not put in its own share of capital to co-finance a project due to fiscal constraints. When an environment clearance cannot be procured or mining laws create an impasse, then the borrower is disadvantaged. As these are lumpy amounts, the propensity to turn bad is faster