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Bad Loans or Non-Performing Approach

Last week, I met up with the chief of a private sector finance company. He was busy sorting out a negotiated deal. Essentially, he was trying to get a borrower to pay up. At the end of 25 minutes, the lender agreed to write off a large chunk of the interest and penal interest. On his part, the borrower had parted with cash, his office near Churchgate, and two flats but there still was the question of about Rs 52 lakh. After some more haggling, they came up with an idea. The borrower (also a GSA for a foreign airline) offered to issue 20 tickets a year for five years through his travel subsidiary. My friend thought about it, made two calls, hemmed and hawed, before yelling out: "Done".

My friend was happy. After asking his deputies to finalise the papers in another cabin he called for tea. Curious about the 25-minute episode, I asked him what the whole deal was about. My friend smiled and replied, "I just cleared a Non-Performing Asset (NPA) off my books. This company owed money for the past five years. If we had not settled, he would have gone to BIFR and we wouldn't have got anything. Any Marwari would tell you: muddal (principal) bachao. Money recovered is money earned."

I left his office, my head reeling with the logic. The next day I read yet another item on NPAs in public-sector banks and how the finance minister had called for another meeting to deal with it. The item — which a journalist friend calls a Formula 44, news report — went through the usual numbers, figures and the ministry's resolve to deal firmly with it. The point the news report didn't mention was that this would be the fourth promised meeting on NPAs this year and more importantly the fact that like in earlier efforts nothing would come off it. Primarily because the ministry seems to believe in a non-performing approach — even if it is contributing to a bad balance sheet and higher interest costs.

Consider the facts: as of November 1999, the total non-performing assets of the banking sector — or very simply the total money notified as bad loans — stood at Rs 58,554 crore or 14.6 per cent of the total money advanced by banks to business. In other words, of every Rs 100 lent by the banks, Rs 14.6 are as good as lost. And just two years ago, the figure was Rs 47,300 crore. Over the past two years banks have collected bad loans worth over Rs 11,000 crore. Not just that, over the past two years banks have had to send good money after bad money and set aside Rs 4,400 crore as provisions. Indeed, so bad is the situation that a large number of banks will have to either increase equity or improve capital adequacy ratios if they want to continue to be in business.

There is another way of looking at it. The sum involved — Rs 58,554 crore — is virtually half the Central plan (Rs 117333 crore for 2000-01). You could also say that it is nearly 10 times the money set aside for agriculture in the Central budget or nearly five times the money allocated to the Ministry of Home Affairs. Indeed, the sum is a little less than the total money to be spent on the defence services — Rs 58,587 crore — this year. Does it have to be this way? Obviously not. Particularly, in an increasingly competitive and globalised world.

Last year, a leading financial expert suggested an option to the Finance Ministry. The option was very simple and to my mind executable — especially in the light of the private-sector experience. The expert suggested that the Government separate the principal and the interest parts of each NPA and write off the so-called penal interest rates. After all, when someone is not paying any interest there is little likelihood of any payment. Once this is done, the NPA figure will look a less daunting.

It can then actually call the offenders and offer them a deal: pay up the principal, convert parts of the interest into equity or if that is not preferred, into long terms zero coupon bonds. The offending parties could also use assets — land, property, shares, units or whatever — to make part payment. If the company is not in a position to pay up or wants it re-jigged, the banks could re-issue the loan at a new interest rate. The logic here is that in a regime when interest rates elsewhere in the globe are sub-10 per cent, the longer an enterprise pays higher interest rates (of over 16 per cent), the lower are the chances of survival and thus pay-back. To be fair to the banks, there could be a proviso where the company directly credits instalments from its bank account as sales proceeds flow in.

Sure, the unions and others will dub this as a sell out. But before they do so, they might want to check out how many of the NPAs have been cleared in recent times and how much money has come in. More importantly, the alternative isn't attractive. What, for instance, happens when a company doesn't pay? Or doesn't want to pay? It approaches BIFR and registers itself. Once the company goes under BIFR, both banks and FIs are required to fork out sums as working capital to keep the enterprise going. Worse, the company doesn't have to pay anyone anything — neither principal nor interest.

As my friend says, "muddal bachao. Money recovered is money earned."

(V Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar Aiyar.)

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