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Banks get a rough deal

P. Devarajan

NONE can match RBI's munificence in defaulting Indian corporates, going by the latest Guidelines for NPA Recovery which have been worked out in consultation with the Finance Ministry.

There is one set of norms for NPAs up to Rs. 5 crores and another for those above Rs. 5 crores, without any explanation for the split.

The cut-off date for NPAs up to Rs. 5 crores is March 31, 1997. The RBI says: ``The minimum amount that should be recovered under the revised guidelines in respect of the compromise settlement of NPAs classified as doubtful or loss as on March 31, 1997, would be 100 per cent of the outstanding balance in the account as on the date of transfer to the protested bills account or the amount outstanding as on the date on which the account was categorised as doubtful NPAs, whichever happened earlier, as the c ase may be.''

Bankers contend that the outstanding amount is reckoned as principal plus compounded interest and banks will now have to recover 100 per cent of the amount as of March 31, 1997, without any interest penalty for the period after March 31, 1997. If this is not a waiver or a subsidy for a corporate borrower, what is it and why should banks take a hit?

It can be argued that after the one-time settlement, banks will be able to write back the provisioning made over the years into their balance sheets. Yet, the RBI move is faulty. Why should the ordinary depositor be slaughtered to help a few corporates?

The RBI guidelines do not apply to wilful defaulters -- but in India every corporate is a wilful defaulter.

For NPAs classified as sub-standard as on March 31, 1997, and which have become doubtful subsequently, banks can charge the current prime lending rate.

What is the logic behind choosing the cut-off as March 31, 1997? The PLR of banks has only dropped between 1997 and is today providing corporate borrowers enough financial benefits.

The RBI says: ``The minimum amount that should be recovered in respect of NPAs classified as sub-standard as on March 31, 1997, which became doubtful or loss subsequently, would be 100 per cent of the outstanding balance in the account as on the date of transfer to the protested bills account or the amount as on the date on which the account was categorised as doubtful NPAs, whichever happened earlier, as the case may be, plus interest at existing prime lending rate from April 1, 1997, till the date of final payment.''

As the assets are NPAs, it can be reasonably assumed that corporates will needle banks with demands for fresh loans to effect the write-offs and lead to ``evergreening'', castigated by the Narasimham Committee. Moreover, after coming clean, nothing preve nts the corporates from starting new projects with bank loans.

It is churlish for the RBI circular to state, ``the banks should follow the above guidelines for compromise settlement of all NPAs covered under the revised scheme, without discrimination and a monthly report on the progress and details of settlements sh ould be submitted by the concerned authority to the next higher authority and their Central Office. Banks should give notice by August 31, 2000, to the eligible defaulting borrowers to avail of the opportunity for one-time settlement of their outstanding dues in terms of these guidelines.''

The Guidelines for Recovery of NPAs above Rs. 5 crores places all the discretionary powers with the Chairman-cum-Managing Directors (CMDs) or, as RBI says, ``on a case to case basis.''

The BJP Government prefers to shy away from changing the laws to help banks recover funds and is obliging the corporates for future trade-offs. All nationalised banks are in negotiations with corporates to squeeze out the best terms as most of them have high-value real assets such as land and buildings.

One banker asked: ``Should one settle the dues of a corporate who has defaulted on PF and gratuity as is the case in all textile mills?''

The RBI scheme negates these efforts and needs to be scrapped immediately.