Small loans could turn bad: Rajan

Small loans could turn bad: Rajan

News

Raghuram Rajan reports on NPA (non-performing asset) to parliament estimate committee

 Issue

• Concern regarding NPA of public sector bank that has increased from 2.83 lakh crore in 2014 to around 12 lakh crore in 2018.

Important facts

Causes of NPA

Global problems

• Due to high growth rate during the period of 2006 to 08, banks overestimation of future in giving loan led to NPA
• Global financial crisis (2008) and slowdown of Indian economy

Governance problem

• Governance problem like fear of investigation and slow decision making in sectors like power  mines and real estate
• Negligence by government regulatory body in assessing NPA problem

Problem with banking sector

• Banking sector was not willing to take investigation for bad loans due to fear from investing agencies
• Corruption and malfeasance in the working of public sector banks
• Banks were ineffective in bringing high profile fraud for taking appropriate action

Problem caused by investor

• Lack of interest from promoters to invest after projects get delayed
• Diversification of funds to unrelated business by investor
• Restructuring norms were being misused by investors
• Fraud done by big investors like Vijay Mallya and Nirav Modi

Causes of NPA rising despite  asset quality review (AQR) by RBI

• Projects that were not revived (restructured) by banks led to increase in NPA
• Risk laden banking sector were not willing to restructure the loans. Delay in the process of clearing bank books due to judicial process
• Loopholes in bankruptcy code which made promoters take undue advantage of laws and regulators.
• Government has not recapitalized banks with urgency
• Reforming governance of public sector bank had  limited impact
• Poor skill resource of public sector bank officials.
• Restructuring schemes such as Asset Reconstruction Companies for NPA had limited impact.
• What RBI could have done Raised more concerns about unorganized lending
• Pushed for early enactment of bankruptcy law

Future threats  of NPA from Small loans

• MUDRA  and kisan credit card loans may turn NPAs in future. 6.37 lakh crore has been given under Mudra scheme through public sector banks, regional rural banks and micro finance institution without collateral
• CGS (Credit guarantee scheme) for MSME (medium small micro enterprise) sector by SIDBI (small industrial development bank of India) has grown in liability
• The outstanding amount on kisan credit card is amounting to Rs.1.6 trillion through 20.3 million cards and has potential to become NPA

Suggestion to prevent recurrence of NPA

Governance in public sector

• Recommendation of P.J Naik committee should be implemented in reforming public sector banks
• Skill  deficit in PSB should be rectified at earliest.
• Appointments at higher posts  should be made through bank board bureau.

Risk evaluation

• Improve the process of risk evaluation
• Risk management processes need substantial improvement
• Cyber risks need greater attention
• Potential NPA risks have to be mitigated wherever possible.

Government intervention

• Improve governance of PSB and distance them from government interference

Judicial intervention

• Out of court restructuring process and bankruptcy process need to be strengthened and made speedy
• Loopholes in bankruptcy code should be fixed at earliest

Ambitious target and loan waiver

• Mudra and kisan credit card loans need to be examined more closely for potential credit risk
• Loan waivers destroy the credit culture, which  needs to be addressed
• Government should refrain from ambitious credit target or waiving loan of farmers