Why Assets In Banks Go Bad or Become NPA

The bad loans of public sector banks grew by a whopping 56% during 2011-12. This has little to do with slowdown and points to a deep systemic malaise. Assuming that the government wants to do something, what steps need to be taken? And what should investors do? An analysis by Gurpur

On the face of it, it appears as if public sector banks (PSBs) have managed to keep their head above water in the past year. However, a closer look reveals that their operations are dangerously vulnerable to the economic uncertainties in India today. After eliminating the last minute window-dressing ...

Appraisal standards of nationalised banks responsible for steep rise in NPAs, says Chakrabarty

According to the deputy governor of RBI, poor appraisal standards of PSBs have led to increased NPAs, something that Moneylife pointed out over a year back. He also said that lack of quality projects and poor implementation of the PPP model was hurting the infrastructure sector

Public sector banks (PSBs) in India are not adhering to best practices while lending out capital to infrastructure companies, which have resulted in steep rise in non-performing assets (NPAs), feels a top official from Reserve Bank of India (RBI).

“There is enough evidence to suggest that a substantial portion of the rise in impaired assets in the sector is attributable to non-adherence to the basic appraisal standards by the banks,” said Dr KC Chakrabarty, deputy governor, RBI, while speaking at a conclave organised by SBI Capital markets.

This is exactly what Moneylife had pointed out in a cover story more than a year ago (Public sector banks - Loans turning bad)!

Dr Chakrabarty also deflected criticism that the infrastructure sector was stalled because of lack of funding. He said it was because of lack bankable and commercially viable projects. The infrastructure sector has been plagued by delays, which had led to an enormous rise in NPAs on part of banks, especially PSBs which has reached worrying levels.

According to the deputy governor, gross NPAs and restructured standard advances for the infrastructure sector, together as a percentage of total advances to the sector, has increased considerably to Rs1.37 lakh crore (17.43%) as at the end of March 2013 from Rs12,190 crore (4.66% of total advances) as at the end of March 2009.  “The evidence suggests that the higher NPA in the sector is not an industry wide issue, it is rather bank specific. In our assessment, the project appraisal and the decision making in public sector banks has been more impressionistic rather than being information based. How else does one defend the eagerness of some banks to fund power distribution companies with negative net worth,” he said.

Dr Chakrabarty also lashed out at infrastructure companies for their over-reliance on debtand expectations from the financial sector to fund their capital needs and the failure of the public-private partnership (PPP) model because infrastructure companies do not have what it takes for a project to succeed.  “In my view, the ‘Public-Private Partnership’ has, in effect, remained a ‘Public only’ venture. The infrastructure companies are highly leveraged and the flow of equity in the infrastructure project funding has been very minimal. The lack of equity investment in a project means that the promoter-developer has little ‘skin in the game’ and the motivation for the success of the venture is that much limited,” he said.

He also said, “The government has tried to address some major impediments like lack of transparency and accountability in procurement in order to ensure that PPP projects are procured and implemented by observing principles of transparency, competitive bid process, affordability, and value for money. But, the impact of these efforts on the ground level implementation is yet to show.” In other words, the government has not done enough to steer the infrastructure sector.

He also highlighted the dismal state of our infrastructure sector, according to which will leave you shocked:

• • Out of 576 SEZs that have received formal approval, only 172 are operational;
• • Against a target of awarding road projects aggregating 50,621 kms during 2008-13, only 10,690 kms have been awarded;
   
• • Out of 16 Ultra Mega Power Projects planned, contracts for only 4 were awarded. Out of this only one has become operational and another is nearing completion and that too much beyond the scheduled dates. Even the one project that has commenced operations is running much below capacity;
   
• • Under the New Exploration and Licensing Policy for exploration of crude oil and natural gas, of the 251 blocks allotted, 110 have reported discoveries but only 6 are actually operational.
   

In order to plug funding gaps, he said that there could be a possibility of relaxing norms for pension/insurance/provident funds so that they can fill in some of the gap in debt financing.

http://www.moneylife.in/article/appraisal-standards-of-nationalised-banks-responsible-for-steep-rise-in-npas-says-chakrabarty/34205.html