Perhaps more importantly, the widespread practice of treating non-performing loans as a percentage of advances camouflages the extent of the bad-loan problem. More relevant would be a comparison of the NPAs with the capital of the concerned bank.

This percentage would show that a large part of the capital and reserves of the banking sector would be wiped out if the bad loans were to be adjusted against capital. The high proportion of NPAs makes it necessary for banks to explore all avenues to recover at least a portion of these bad loans.

Unfortunately, the legal process in this country is so tortuous and long-drawn that assets hypothecated to the bank frequently lose all value when they are finally disposed off. Receivers appointed to take charge of assets can often be bribed, while adjournments in hearings can be had quite easily. Under these circumstances, the total costs, including the opportunity costs, of relying on the legal process to take its course can be extremely high.

This is especially so in the case of the thousands of small loans, where the end-product of filing a recovery suit is often a decree authorising payments in easy instalments with a minimum rate of interest. Under these circumstances, compromise and write-off agreements can be an easy way out for the bank.

The trouble is, such agreements can easily be interpreted as a sellout to the borrower, and vigilance inquiries can result from sanctioning write-offs and compromises. Bankers would, therefore, prefer to play safe. If the RBI formulates a set of guidelines, bankers would be more inclined to consider such proposals, with beneficial results for the banks.