The two facets of NPA management

The two facets of NPA management

Article:

1. Santsoh Kumar Das and Divya Sharma of Institute for Studies in Industrial Development discusses various measures for an effective NPA management

Important Analysis:

2. The steady rise of non-performing assets (NPAs) and wilful defaults highlights the concerns over effectiveness of NPA management in India

3. Until recently, the measures taken by government and Reserve Bank of India have primarily focussed on managing existing NPAs. However, there needs to be equal focus on preventive measures

4. Measures to be taken for effective NPA management:

• The government and RBI should play a greater role for ensuring effective NPA management

Preventive measures:

• Creation of a framework to ensure transparency in the operation and management of Scheduled Commercial banks (SCBs), primarily public sector banks

The framework should be based on four parameters:

• Project appraisal: It is of utmost necessity to create a robust credit appraisal mechanism
• Monitoring: Technical capabilities should be enhanced to facilitate project monitoring
• Accounting: Emphasis on ensuring transparency and efficiency in the accounting system
• Auditing: Audit system of the banks should be strengthened

Bad Bank

• A public funded asset management company- bad bank should be created to deal with stressed assets of public sector banks
• A resolution mechanism should be formulated in order to facilitate recovery. This would reduce the burden on banks or the government
• Best practice: The Swedish Model of Bad Bank
• Swedish Bad Bank ‘Securum’ operated for 15 years. It was fully government-owned
• The bad bank in Sweden bought the stressed assets from the affected banks. This was then sold it at a higher price during an economic expansion when asset prices increased. This facilitated maximum recovery on the bad loans
• Similarly, a fully government-owned bad bank can be created in India. Managerial staff can be outsourced to ensure better operational and managerial efficiency. The bad bank should remain accountable to the government.
• Given the financial constraints, the government can partly finance the proposed ‘bad bank’ by issuing equity shares. The government should hold the majority of the shares.