Economic downturn one of many reasons for rising bad loans: Raghuram Rajan

Asked to explain the "real causes" of ballooning bad loans at public sector banks, RBI Governor Raghuram Rajan has put the blame on "overall economic downturn", among other reasons, in his submission to the key Parliamentary Panel.

Congress leader K V Thomas-led Public Accounts Committee (PAC), whose term ended on Saturday, has examined Rajan's response but can ask the RBI Governor to appear before it in future once it is reconstituted, sources said.

Various public sector banks may also be asked to appear before the panel again to explain their position.

The Parliamentary Panel had suo motu decided to examine the non-performing assets of the public sector banks, which touched Rs 3.61 lakh crore at the end of December 2015.

At the end of December, as many as 701 accounts with bad loans exceeding Rs 100 crore owed public sector banks (PSBs) Rs 1.63 lakh crore, while SBI accounted for the biggest chunk.

PSBs had first refused to appear before PAC, but agreed later and made their submission.

During the examination of bad loan recovery process of the banks, the PAC found that in a number of cases the same bankers were trying to retrieve the bad loans who had earlier sanctioned the loans.

"Since the same officers, who sanctioned the loans are trying to retrieve it, it remains to be seen how successful they will be... It seems they did not have a mechanism," a PAC member said on the condition of anonymity.

In its questionnaire for the RBI Governor, the panel observed that Private Sector Banks and Foreign Banks do not have as much NPAs as the Public Sector Banks. This was despite the constraints under which the entire banking sector operates being the same, except for the Priority Sector Lending (PSL) requirements.

Noting that Private Sector Banks and Foreign Banks have 2.2% NPAs whereas the Public Sector Banks have 5.98% NPAs, the PAC felt "it is hard to believe that the difference is only due to the PSL".

The PAC Chairman also sought to know the "real causes for the present spurt in NPAs and stressed assets" and whether these are really different from those listed by the Narsimham Committee that went into the NPA issue in 1998.

In his reply, Rajan said, "While some of the reasons for recent spurt in NPAs could be subset of those indicated by Narasimham Committee, the level of stressed assets are seen in the context of overall economic downturn".

Rajan listed six primary reasons for spurt in stressed assets that have been observed in recent times.

These included domestic and global economic slowdown, delays in statutory and other approvals especially for projects under implementation and aggressive lending practices during upturn as evidenced from high corporate leverage.

Other reasons cited by Rajan were laxity in credit risk appraisal and loan monitoring in banks and lack of appraising skills for projects that need specialised skills resulting in acceptance of inflated cost and aggressive projections. Besides, he also listed wilful default, loan frauds and corruption in some cases among the key reasons. 

Recalling that the gross non-performing assets (NPAs) ratio had steadily declined from 15.7% in 1996-97 to 2.36% in 2010-11, Rajan said that the asset quality of the Indian banking system has again come under stress in the last couple of years, as a consequence of global as well as domestic economic slowdown.

"As on March 25, the gross NPA ratio was 4.62%. As on June 2015, the gross NPA ratio was 4.97% and the ratio of restructured standard assets to gross advance was 6.50%," he said in the reply.

Rajan also informed the panel about seven key methods evolved by way of recent regulatory measures by RBI to tackle the problem of NPA.

The Committee, however, felt that the six reasons cited by Rajan were not "mutually exclusive" and wanted to know how much of NPAs and stressed assets are attributable to genuine business/commercial risk and those which are not.

Rajan said that during the course of an internal study conducted to assess the causative factors of NPAs in April last year, primarily qualitative information on causes of NPA in banks were sought from the responses received from banks, the main reasons with broad categorization of 'economy-wide factors, borrower-level reasons and bank level inadequacies' came to the fore.

"However, based on responses, it was not possible to specifically derive how much of the NPA (quantum) were attributable to which specific reason as often several reasons, sometimes mutually reinforcing, played out at the same time to turn a loan into NPA," the RBI Governor said.

Rajan also noted that banks tend to attribute most of the non-performance issues to business/commercial risks of the borrowers, whereas the borrowers attribute such situations to macro-economic factors for banks for not providing timely finance/enhancements etc.

"Hence case to case compilation of causative factors as reported by the bank many not reflect the actual proportion of non-performance owing to genuine business risk. The ongoing write-offs/sales/recovery activities under credit administration process of banks also affect the share of such loans in the portfolios of all NPAs," he said in the reply.

As per the government, the main reasons for rise in NPAs are sluggishness in the domestic growth in the recent past, slow recovery in the global economy and continuing uncertainty in global markets leading to lower exports of various products such as textiles and leather.