Retired Principal

Staff Training College,



Banks are the backbone of every economy. It is very important that Banks remain healthy financially. Otherwise, a financial crisis can hit a country leading to recession like the US in 2008. This is especially true for developing countries like India. Banks are indeed the lifeline of the economy and play a catalytic role in activating and sustaining economic growth. But I am sorry to state that our Banks are not in a very healthy state. And the single most important factor that is affecting their profitability is ‘Stressed Assets’. And the problem has taken such an alarming proportion that, if not checked timely, consequences may be dire.


First of all, I will tell you the magnitude of the problem. After the initiation of ‘Asset Quality Review’ by RBI in the second half of 2015, it has been observed that almost a sixth  of the Public Sector Banks’ Gross Advances are Stressed Assets which includes not only Non-performing Assets but restructured assets as well. A significant majority of these are Non-performing Assets (NPAs). For Banks in the worst shape, the share of assets under stress has approached or exceeded 20%. This estimate of stressed assets has doubled from 2013 in terms of what had been recognized by Banks. The doubling of stressed assets is also the case for Private Sector Banks, but their ratio of stressed assets to Gross Advances is far lower and their Capitalization level far greater. Since it is common knowledge that Banks, as per RBI instructions, cannot charge interest on NPA accounts and at the same time, they have to do provisioning, in some cases even 100%, this affect the profitability of the Banks


The Asset Quality Review has taken a massive stride forward in bringing the scale of this problem out in the open and stirring a public debate about it. However, very little has been achieved in resolving the underlying assets to which Banks had lent. Several resolution Mechanisms and frameworks have been offered by the RBI to the Banks to get this going but the progress has been painfully slow. Most of the assets remain laden with such high level of bank debt that Interest Coverage Ratio is less than One. In other words, they are not generating even so much revenue as could pay their interest. In such a scenario, who will come forward to meet their Working Capital and Capital Expenditure needs. Private Investors, in such scenario, cannot be expected to come forward to turn them around. Original promoters – who rarely put in any financing have had somewhat of a field day, facing limited dilution, if any, of their initial stakes nor much of a threat of being outright replaced.


But before I discuss as to why the various resolution mechanisms advised by the RBI and others enacted by the Government are not working to bring the level of stressed assets to manageable level, I will tell you a very pertinent point as to how the Banks’ stressed assets got doubled in a span of just 2 years. Did things go so bad in these 2 years that they reversed fortunes of Indian Banks. Of course, some problems – like ‘Global Slowdown’ did emerge that affected our Banks but the main reason was something else.


And that reason is the incentive of not declaring Stressed Assets. The tenure of CEO or CMD of a Bank is always limited  to 3 to 5 years. No CEO or CMD of a Bank wants that during his/her tenure, a bad picture of the Bank may come in the public domain. For this reason, every successive Bank Chief was trying to put the bad loans under the carpet and not classifying the account as NPA.  And when the things went beyond a point, the account was restructured just to avoid it being shown as an NPA account.


It may be told that a loan account, if restructured before classifying it as NPA, retains the status of ‘Performing Asset’. Examples are not lacking in all the Banks where the accounts were restructured very many times, though as per RBI guidelines, they could be restructured only once. All this fudging was going on when the then RBI Governor Rajan took a bold step and ordered the ‘Asset Quality Review’ of Banks and brought the cat out of the bag.


A pertinent question that must be coming to the minds of readers is “Is there no remedy of the problem?” No, readers, no – the remedies are there and are being applied – the only thing is that everything in India moves at a snail’s pace. We are the most intelligent people in the world who can find ways where none exist. We have shown to the world that howsoever stringent law the Government may have, we have a way out and we have shown it during Demonetization that for every law, we have a hundred ‘jugaads’


Immediately on assuming office in 2013, the then Governor Rajan observed that one reason for the poor Assets quality of Banks is that the Assets are allowed to wither before any worthwhile action is taken by the Banks. So, he instructed Banks to, whenever an account shows sign of decay, a Joint Lenders Forum be formed of all the Banks, who are party to the loan and a decision whether the unit is to be revived or allowed to die a natural death be taken. Incentives and dis-incentives were also kept for Banks for taking timely decision. And it was also made clear to all the Banks that “Restructuring”- the option that the Banks were used to hitherto, is not the only option to be exercised. But the system, despite all coaxing and cajoling, did not work that well as was expected to be.

The Government, on its part, has also taken a good number of steps. SARFAESI Act, Recovery of Debts due to Banks (RDDB Act) {popularly known as DRT Act} were also enacted but the problem is that whereas the Government in DRT Act simplified all procedures and stated that the cases will be decided in 6 months time but the reality is that some cases are still going on in the Tribunals for the last 3 years. So the very purpose of forming DRTs – that of expediting the cases, has been defeated.

Now, the Govt. has come up with a new measure and that is the Bankruptcy Code  to improve the Asset Quality of Banks. Hitherto, even if an individual, a partnership firm or a company was not in a position to repay its creditors or in other words, had gone bankrupt, it used to take 3-4 years to get him declared Bankrupt and its assets sold off to pay its creditors. By passing the Bankruptcy Code, a period of 180 days has been prescribed for an entity to be declared ‘bankrupt’. Only time will tell whether the Government is in a position to enforce this timeline or the “Mallyas’ of India will continue to have a hey day” (I think no discussion on NPAs in India is complete till you add the name of Vijay Mallya)

Improving Assets Quality is going to be the biggest challenge for the Banks for the next few years.



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