As NPA woes mount, is asset discovery the way forward?
Deepak Bhawnani

Everyone is aware of how non-performing assets (NPAs) are stressing our economy in general, and the banking sector in particular. A comparison of the non-performing loans ratio of 25 large Asia-Pacific banks, which are part of the Bloomberg Asia Banks Large Cap Index, shows that large Indian banks have the worst NPA ratio when compared to their large cap peers in the region.

As is also apparent from a recent report by CARE titled “NPAs in Bank – June 2017,” the number of NPAs are staggering and growing every quarter. As per the report, in the first quarter of the current financial year, NPAs of 38 banks increased by a sharp 34.2% on a year-on-year basis. In addition, the NPA ratio increased to 10.21% in June 2017 from 8.42% in June 2016, which is the highest in the last six quarters.

As per the data available till June last year, gross NPAs of 38 public and private sector banks amounted to Rs 829,338 billion, of which five banks – State Bank of India, Punjab National Bank, Bank of India, IDBI Bank and Bank of Baroda - account for a 47.4%, totalling Rs 393,154 billion.

Fitch Ratings estimates Indian banks will need $65 billion of additional capital by March 2019 to meet Basel III global banking requirements.

According to Moody's, the top 11 state lenders alone will need nearly $15 billion. The government has only $3 billion left in its budget for bank recapitalisation.

Seeking solutions

The impact of growing NPAs on the overall economy is manifold. Banks have to adhere to the provisioning norms set by the Reserve Bank of India for bad loans, which eats into their profitability. This leads to banks having lesser capital to deploy, shareholders losing money and banks finding it tougher to survive.

This will likely affect interest rates. Increase in interest rates will directly impact borrowers from small-scale industries and those looking to set up projects with long gestation periods.

The government and the central bank have been consistently making efforts to bring down the number of NPAs such as bringing into force the Insolvency and Bankruptcy Code, taking actions against wilful defaulters etc. The impact of these efforts is yet to manifest.

Asset discovery

Consequently, financial institutions including banks have to continuously evolve ways and strategies to recover dues from defaulters, and one such approach select financial institutions have started to use is searching for borrowers’ assets.

Under this approach, dedicated process-based research, focused site visits and relevant investigations are undertaken to confirm the status, not only of known assets, but to also identify undisclosed assets of such borrowers.

Asset discovery investigations have led to significantly valued assets being unearthed.

The Supreme Court, in the matter of Industrial Investment Bank of India Ltd. vs. Biswanath Jhunjhunwala held that, “the legal position as crystallized by a series of cases of this Court is clear that the liability of the guarantor and principal debtors are co-extensive and not in the alternative.”

In addition to undertaking asset searches of the borrowers, lenders simultaneously undertake such searches for unknown assets of the personal guarantors too.

In a nutshell, it is an accepted reality that our banking system is under immense stress due to growing number of NPAs. In turn, financial institutions are under significant pressure both from the RBI and the government to control these numbers and recover dues. In such a scenario, organisations undertaking asset discovery expertise can play a positive role in helping the economy.

Deepak Bhawnani is the founder and chief executive officer of Alea Consulting.

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