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Smart NPAs

OVER-SMART, PIN-UP BANKING of the ICICI genre seems to have run its course with the lead financial institution reporting a fourth quarter loss for the last year with net profit dropping by 55 per cent to Rs 537 crore.

In opting for higher provisioning and write-offs of Rs 813 crore, Mr K. V. Kamath, chief executive officer strongly identified with ICICI, has turned a conservative, the only appropriate stance for any banker to take when the economy is still figuring out the nuances of reforms. For ICICI, the change should help though it is debatable if it was not quietly forced on it by the RBI. From 2001, the entity has decided to make accelerated provisions against NPAs ``as a more conservative policy' ' and will provide ``additional cushion'' to tackle volatility in the coming years when the economy struggles to adjust to global play.

Apparently, the idea follows the RBI plea to the financial system to turn profits as an insurance cover against any bulge in the NPAs by going beyond the minimum provisioning norms prescribed. Give and take a few NPAs and there is nothing much to disting uish one financial institution from another, with IFCI probably being the worst case. The same probably holds for government banks nursing NPAs amounting to Rs 52,806 crore as on February 28, 2001. Being a private entity, ICICI can freely opt for write-o ffs which operational elasticity is not available for most others, owned as they are by the government. Still, banks and FIs, holding sizable equity stakes in most corporates, have not been able to correct erring managements even in the post-reform era. It is hardly surprising that the government is becoming increasingly reluctant to come up with recap funds to bale out some of the players.

With the economy dragging, the banks and FIs will find it hard to pick up quality assets and the little business that comes their way will insist on cheaper funds. Financial entities will have to drop the excuse of protecting spreads (especially after VR S) to snap up fresh accounts, and a strategy on which the RBI is harping is to cut the number of subsidiaries. ICICI is working on it while many banks are keen on folding up their housing, mutual fund and other arms. Effective April 1, 2001, banks will h ave to present a consolidated balance-sheet, including of their subsidiaries, and set apart additional capital for any capital erosion. Subsidiaries of most banks are non-performers and bank managements have agreed to wind them up to focus on the old-sty le but valid concept of accepting deposits and lending them to generate assets. Maybe, Sundaram Finance could be the apt model. On the way, some of the banks, like FIs, will have to merge to remain viable and they have time till 2004 when the newer and t ougher Basel Capital Accord comes into force.