Financial intermediation by banks is an engine of growth because they cause money to be circulated in the economy by seeking deposits from those who have surplus and lend for investment activity. It has a multiplier effect in the economy. One major reason for muted credit growth is fast accretion of Non-Performing Assets (NPAs) on banks’ balance sheets. Roughly 72 per cent of market share of outstanding credit of SCBs (Scheduled Commercial Banks) is of PSBs. The twin balance sheet problem is overleveraged and distress companies coupled with rising NPAs of PSBs is holding up investment ¡n the economy.

Across the broad spectrm of industries, those which are under stress include primarily basic metals and their products, cement and their products, textiles, infrastructure etc.

The reasons for this state of affairs are:

1. a) Exuberance in increasing balance sheet size by lending to borrowers unworthy of such loans on account of their past credit history.
2. b) Funds were borrowed for creating excess capacities in anticipation of demand without factoring in the global capacities/demand supply position.
3. c) Project completion was delayed for various reasons.
4. d) Recovery of receivables was poor.
5. e) The concerned corporate was not able to raise capital through the issue of equity or other debt instruments from capital markets and used borrowed money as equity leading to double leveraging. Banks did not look at the colour of the equity.
6. f) Business failure because of over optimistic projections.
7. g) Diversion of funds meant for Expansion/modernisation.
8. h) Wilful defaults, siphoning of funds, fraud, mis-appropriation etc.
9. j) Lack of skill on the part of the banks to monitor end use of funds and diversion by the borrower through web of shell companies etc.
10. j) Deficiency in credit appraisal and improper due diligence.

Fraud/ wilful default:

• There is a lag of nearly 3 to 4 years before NPAs out of the fresh lending appear. Fresh creation of NPAs during the phase of growth get masked by the high growth of advances and ever greening. Gross NPA ratio does not show alarming rise as denominator advances increase much faster than the numerator (NPA).
• Banks should make themselves alert about the emerging situation by effectively monitoring the cause of delinquency (for reasons as stated above) coupled with prompt corrective action to deny fresh loans to wilful defaulters and for sum optimal projects.
• They should take the intent of RBI circular to monitor/pickup early warning signals (EWS) with all seriousness and declare the errant borrower as non cooperative or wilful defaulter.
• The provisions of company law as detailed below provide ammunition to bankers to initiate action and refer such cases to the Serious Fraud Investigation Office (SF10): As per section 447 of the Companies Act, 2013, a new offence of fraud in relation to the affairs of a company is as under: Any act or omission, concealment of any fact or abuse of position committed by any person with intent to deceive or to injure the interest of the company or its shareholders or creditors, whether or not there is a wrongful gain or loss, can be investigated by Serious Fraud Investigation Office (SF10) Cases of wilful defaults can, therefore, be entrusted to the SF10 to investigate whether such default amounts to serious fraud under Section 447 of the Companies Act.
• Unless the banks are in a position to establish dishonest intention and false representations on the part of borrowers, it is difficult to initiate criminal proceedings against borrowers for wilful defaults.
• Any person who is found to be guilty of fraud- imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and fine — Not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

There are enabling laws which are specifically meant for banks to recover default amount from borrowers viz RDDBFJ Act, SARFAESI Act -02 and recent legislation of Insolvency and Bankruptcy Code 2016.

• SARFAESI Act allows bankers to take possession of the assets charged to the bank and auction these without intervention of the Court. No doubt it is a powerful tool and with proper planning and perfect execution the assets can be sold.
• The recent ordinance debars wilful defaulters from buy1 back their companies after diverting loan amount and /or making their accounts NPA has taken wind out of the sails of such promoters.

What can be done?

• Banks need to do forensic audit for ascertaining the end use of funds.
• Big Data Analytics and other IT based solutions should be used for doing proper due diligence about the borrower and his businesses like fintech companies are doing.
• Artificial Intelligence(AI) can be leveraged to predict default at least one year in advance with confidence of 80 per cent. A fintech company like D2K technology of Navi Mumbai has developed such a software and results have been remarkable.
• Banks have to fine tune their HR policies to train the young work force, which at present lacks experience, and upgrade their skills.
• The government on its part has to appoint professionals on the Board of Banks having domain knowledge and sufficient experience of Bank’s functioning. Selecting retired executives like MI and ED having impeccable track record on the bank Board is worth examining.
• To expedite recovery, government will do well to have a few more NCLTs and large number of DRTs as present benches are woefully short to achieve this objective.
• Strength of judges can be increased to cope up with the workload. With the coming in of insolvency of individuals, proprietors and partnership firms, the need will be acutely felt.

TIT BITS:

The Union Cabinet chaired by PM has approved that the Merchant Discount Rate (MDR) applicable on all debit card/BHIM UPI/Aadhaar enabled Payment System (AePS) transactions upto and including a value of Rs. 2000 will be borne by the Government for a period of two years with effect from 1st January, 2018 by reimbursing the same to the banks.

Since such transactions account for sizeable percentage of transaction volume, it will help to move towards a less cash economy. Similarly, MDR is charged on payments made to merchants through BHIM UPI platform and AePS.