How serious is the crackdown on NPAs

How serious is the crackdown on NPAs
Sucheta Dalal

As the time for another round of bailouts of sick banks and financial institutions approaches, the Finance Ministry is rhetoric about ``cracking down'' on Non-Performing Assets (NPAs) of banks and financial institutions affects a new seriousness and intensity. Indian Bank (wants Rs 1,700 crore), United Commercial Bank and United Bank of India are lined up again for a massive bailout; and the Industrial Finance Corporation of India wants Rs 400 crore in the form of preference capital.

The bailout is not so simple. Bank Unions reacting to a proposal to close down weak banks blamed corporate defaulters for the high level of NPAs (Rs 58,000 crore for banks and financial institutions); the Federation of Indian Chambers of Commerce and Industry (FICCI) has countered this charge by blaming priority sector lending for the high NPA levels. The Finance Minister may finally be in a spot where he cannot fund banks/institutions any more without a real reform plan. In the last decade alone, several high-powered committees starting with the first Narasimham Report have looked at ways to tackle the NPA problem. They have examined the ``ever-greening'' of accounts by the financial sector (giving fresh loans to repay earlier loans/interest) and fudging of NPA figures. The clean up suggestions have included the creation of an Asset Reconstruction Fund and the merger of weak banks with stronger ones. Yet, ten years on, the complete absence of a solution is highlighted by the Business Standard report sayingthat ``fresh accretion of NPAs in 1999-2000 has outpaced the recovery of bad loans.''

The Finance Minister will have to look at improving disclosure by banks and bettering recovery procedures. Asset reconstruction is central to the reform agenda, but this is predicated on correct evaluation of risk, allocation of risk weightages and the determination of the discounted value of NPAs. Certain experts have suggested that the private sector would be interested in setting up an Asset Reconstruction Agency and the securitisation of bad loans if disclosure standards and the classification of loan accounts were improved. That is easier said than done. The premier credit rating agency, CRISIL has pointed out that disclosure by banks leaves a lot to be desired particularly in areas such as assessment of business strategy, asset quality and asset liability mismatches. Only when risk assessment becomes more precise will an independent Asset Reconstruction Agency be in a position to issue marketable bonds at interest rates, which are commensurate with their risk-weighted valuation, and the period of bondredemption.

At present, banks and institutions continue to blame political interference for their inability to tackle NPAs or bad recovery laws, but they cannot shirk responsibility for some serious errors in judgement while lending to a few new groups. They also cannot explain why they continue to fund such projects and postpone the problem, except to hide their own NPAs.

Look at some examples.

Marathon of the US has allowed its second deadline for taking over Essar Power to lapse. The deal fell through on the sticky issue of supplying concessional power to Essar Steel. The steel company would turn unviable if it paid market rates for power. Already its losses have mounted to Rs 581 crore in the year ended March 31, 2000. And the group continues to look for institutional funds for three other projects including the Essar Oil refinery and the Vadinar power project. The saga of Essar's financial problems and its well-known default on foreign borrowings has been well documented by the press. Those looking into the issue of evergreening of accounts ought to ask how Essar Power alone appears as a defaulter on bank and institutions' books and not the other companies.

Electric du France has finally pulled out of the fast-track Bhadrawati power project which has been making slow progress for the last seven years. At the same time the Ispat Metallics project has announced a cost overrun for the third successive year, this time of Rs 280 crore; the project cost which was originally Rs 1,074 crore has ballooned to Rs 2,120 crore. The group also owes a whopping Rs 110 crore plus to the Maharashtra State Electricity Board. Here too, market analysts had no doubts about the fate of the Mittal projects. They have long questioned the future of the group after the Mittal brothers split and Laxmi Mittal gained control over the profitable companies. Pramod and Vinod Mittal are stuck with ambitious projects based on funding by banks and institutions.

British Steel Plc of the UK has pulled out of JBS Steel Products Ltd, a 50:50 joint venture with Sajjan Jinda's Jindal Iron & Steel Co. Though no significant investments have been made in the project, the decision reflects the British company's pessimism about its collaborator and the future of the steel business. A news report suggests that the fund-starved Jindal group plans to buy-out the foreign company's stake until it finds another strategic partner. The division of the Jindal empire among the four brothers is an open secret, as is the fact that Sajjan Jindal's companies are the shakiest. Yet, it suits banks and financial institutions to club them together to maintain the illusion that the large lending to the group is no cause for worry.

Sajjan Jindal is also being helped by ICICI in replacing Tractabel as its 50 per cent partner in the Vijayanagar power project. Tractabel has been allowed to exit without a new partner being found for the 260 MW project which was to power the Jindal Vijayanagar Steel Project. As in the case of Essar Power, the key issue is the supply of power to Jindal Vijayanagar at concessional tariffs. Attempts to replace Tractabel with Powergen have come a cropper and there is a chance that ICICI will be left holding the Tractabel stake.

It is not that banks and financial institutions do not perceive a huge potential problem developing through their actions. It's just that they find it more convenient to simply postpone the issue until the government finds a solution or it cannot be hidden anymore. The issue is, can a government which is struggling to push through target-based disinvestment implement a far tougher project of ``cracking down'' on loan defaulters in order to reduce NPAs and strengthen the financial system?

-- Author's email: suchetadalal.com