'NPA'. The three letters strike terror in banking and business circles today. NPA is the short form of 'Non Performing Asset'.
The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 180 days, the entire bank loan automatically turns a 'non-performing asset'. This arithmetic has made automatic the classification of a loan as performing or non-performing. The recovery of loans has always been problem for banks and financial institutions. In the past after factoring different attributes of a loan --like who has borrowed, their record, whether the industry is cyclical-- they would classify their loans as good, doubtful or bad. How then did the paradigm shift from assessing a debt as doubtful or bad to automatic classification of debts into NPAs?
Before getting into details, let's look at the anatomy of the NPA issue in India. The first issue is when the Indian economy is not performing, can non-performing accounts in banks be avoided? Cannot be. Another point. Many western scholars are coming round to the view that the infamous Washington Consensus, which is the mother of the idea of globalised NPA norms, is a failure. They now say that domestic finance should be based on counter cyclical approach, that is, if the economy is under-performing there should be liberal financing to lift the economy. Today's NPA policy is precisely the other way round.
The second issue is the total amount of NPAs in the Indian financial system. This is estimated at Rs 120000 crores. Break this figure up. Just three categories of loans account for half this figure. Loans to petroleum sector [Rs 29000 crores], to steel sector [Rs 22000 crores], and to the infamous Enron power project [Rs 9000 crores]. Can the banks tell steel and petroleum industries to go to hell? Not if our economy has to survive. These portfolios have to be restructured. Once restructured, they will disappear from the NPA radar. However the money sunk in Enron is gone. Eventually, for all its sins, the government will have to offer this amount as a subvention or as subsidy. Deducting these loans, the resulting balance Rs 60000 crores [over $12 billions] is within 10% of the total commercial credit of banks and financial institutions. This is less than 4% of our GDP.
Look at Japan and China and other Asian nations in contrast. The total NPA in Japan is estimated at $1.26 trillions, equivalent to about 26% of Japan's GDP. In China it is $600 billions, that is, 45% of its GDP; in Malaysia 48% of its GDP; in Thailand 41% of its GDP; in Taiwan 27% of its GDP. Compare this with NPA at 4% of India's GDP. Where is the comparison? Yet despite all pressure Japan has steadfastly refused to accept the NPA norms universalised by the west. But surprisingly we have.
Universalised NPA rule is a western strategy to keep global banking and finances under its thumb. It is tailor made to suit equity-driven economies, that is, the Western ones. In the US where 55% of the households are linked to the stock market, equity constitutes most of business finance with debt playing only a limited role. In contrast in India less than 2% of household savings is invested in stocks. The result. India is debt-driven with more than 2/3 of the business funds being provided by debt. It is the other way round in the US driven by high equity and low debt. Where, with such low debt, interest or principal remains overdue for more than 180 days, the debt may be automatically regarded as non-performing. In contrast in India where debt in business is two times the equity, if the large debt is not serviced for 180 days, it cannot be automatically labelled as non-performing, without further appraisal.
Yet once a borrower is unable to pay interest for more than 180 days his account is to be regarded as non-performing and the new rule will deny him further credit, which he needs most then. With banks handling over 60% of national financial savings and the government handling the balance, where else will needy businessmen turn for funds? Thus, starved of funds, businesses, which are only weak, turn sick. Even though the banker knows the problem, he cannot fix it, thanks to the rule. Should any banker breach the rule to solve the problem of his client he is sure to end up in CBI custody. Will any banker risk his job and self if he has to deviate from the rules to save businesses? Never. What then does he do? He does not lend at all. That is why Indian banks are flush with funds and the businesses are starved of them. By the way, how can CBI authority over bank business and globalisation co-exist? Has any advocate of globalisation thought about it?
Not just on banks. The RBI has forced the NPA rule even on non-banking finance institutions. Ask non-banking finance companies about their experience. You will hear from them stories after stories as to how there is disconnect between the rule and their business. They will say how their clients like the Malabar lorry operators will tell them 'sir, for the next one year we will not pay any instalment; we will pay everything at the end of the year', and will do so promptly. But even though the finance companies would get their payments at the year end as the lorry operators had assured them, they would have to declare their accounts as NPAs meanwhile, leading to disastrous consequences to finance companies.
Indisputably, the NPA rule is unsuitable to banks and business; even harmful, killing both, why, our very economy, all at one stroke. Ask the bank heads in private, and see how critical they are about RBI for enforcing the global NPA standards as a fit-all-model. 'It will finish the banks and businesses' they whisper. So do the finance company promoters who are more efficient than some bankers. Of course all of them only whisper, not talk. Yet every one, including the media, swears by this suicidal rule as if it were an inerrant law. Why rules disconnected to India are framed? Simple. Those who frame them are disconnected from India.
The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 180 days, the entire bank loan automatically turns a 'non-performing asset'. This arithmetic has made automatic the classification of a loan as performing or non-performing. The recovery of loans has always been problem for banks and financial institutions. In the past after factoring different attributes of a loan --like who has borrowed, their record, whether the industry is cyclical-- they would classify their loans as good, doubtful or bad. How then did the paradigm shift from assessing a debt as doubtful or bad to automatic classification of debts into NPAs?
Before getting into details, let's look at the anatomy of the NPA issue in India. The first issue is when the Indian economy is not performing, can non-performing accounts in banks be avoided? Cannot be. Another point. Many western scholars are coming round to the view that the infamous Washington Consensus, which is the mother of the idea of globalised NPA norms, is a failure. They now say that domestic finance should be based on counter cyclical approach, that is, if the economy is under-performing there should be liberal financing to lift the economy. Today's NPA policy is precisely the other way round.
The second issue is the total amount of NPAs in the Indian financial system. This is estimated at Rs 120000 crores. Break this figure up. Just three categories of loans account for half this figure. Loans to petroleum sector [Rs 29000 crores], to steel sector [Rs 22000 crores], and to the infamous Enron power project [Rs 9000 crores]. Can the banks tell steel and petroleum industries to go to hell? Not if our economy has to survive. These portfolios have to be restructured. Once restructured, they will disappear from the NPA radar. However the money sunk in Enron is gone. Eventually, for all its sins, the government will have to offer this amount as a subvention or as subsidy. Deducting these loans, the resulting balance Rs 60000 crores [over $12 billions] is within 10% of the total commercial credit of banks and financial institutions. This is less than 4% of our GDP.
Look at Japan and China and other Asian nations in contrast. The total NPA in Japan is estimated at $1.26 trillions, equivalent to about 26% of Japan's GDP. In China it is $600 billions, that is, 45% of its GDP; in Malaysia 48% of its GDP; in Thailand 41% of its GDP; in Taiwan 27% of its GDP. Compare this with NPA at 4% of India's GDP. Where is the comparison? Yet despite all pressure Japan has steadfastly refused to accept the NPA norms universalised by the west. But surprisingly we have.
Universalised NPA rule is a western strategy to keep global banking and finances under its thumb. It is tailor made to suit equity-driven economies, that is, the Western ones. In the US where 55% of the households are linked to the stock market, equity constitutes most of business finance with debt playing only a limited role. In contrast in India less than 2% of household savings is invested in stocks. The result. India is debt-driven with more than 2/3 of the business funds being provided by debt. It is the other way round in the US driven by high equity and low debt. Where, with such low debt, interest or principal remains overdue for more than 180 days, the debt may be automatically regarded as non-performing. In contrast in India where debt in business is two times the equity, if the large debt is not serviced for 180 days, it cannot be automatically labelled as non-performing, without further appraisal.
Yet once a borrower is unable to pay interest for more than 180 days his account is to be regarded as non-performing and the new rule will deny him further credit, which he needs most then. With banks handling over 60% of national financial savings and the government handling the balance, where else will needy businessmen turn for funds? Thus, starved of funds, businesses, which are only weak, turn sick. Even though the banker knows the problem, he cannot fix it, thanks to the rule. Should any banker breach the rule to solve the problem of his client he is sure to end up in CBI custody. Will any banker risk his job and self if he has to deviate from the rules to save businesses? Never. What then does he do? He does not lend at all. That is why Indian banks are flush with funds and the businesses are starved of them. By the way, how can CBI authority over bank business and globalisation co-exist? Has any advocate of globalisation thought about it?
Not just on banks. The RBI has forced the NPA rule even on non-banking finance institutions. Ask non-banking finance companies about their experience. You will hear from them stories after stories as to how there is disconnect between the rule and their business. They will say how their clients like the Malabar lorry operators will tell them 'sir, for the next one year we will not pay any instalment; we will pay everything at the end of the year', and will do so promptly. But even though the finance companies would get their payments at the year end as the lorry operators had assured them, they would have to declare their accounts as NPAs meanwhile, leading to disastrous consequences to finance companies.
Indisputably, the NPA rule is unsuitable to banks and business; even harmful, killing both, why, our very economy, all at one stroke. Ask the bank heads in private, and see how critical they are about RBI for enforcing the global NPA standards as a fit-all-model. 'It will finish the banks and businesses' they whisper. So do the finance company promoters who are more efficient than some bankers. Of course all of them only whisper, not talk. Yet every one, including the media, swears by this suicidal rule as if it were an inerrant law. Why rules disconnected to India are framed? Simple. Those who frame them are disconnected from India.
(Author : S Gurumurthy)
1 comment:
The NPA Is the Product misanagement of the enterpreners and Bankers . There are 3 type ofNPA Accounts in India. !, willful defaurters. @ Defaurlters quite beyond the controll of enterpreners such as environ gronds. 3, Fraudulant act of mis management by bankinking officals and burocrats. for examples ETC and solutionse after the response of public and banking officialse response in the matter.Regards To Google.com.
Post a Comment