Identification And Resolution of NPA; Regarding Strength of Our Banks

By Gopal Krishna Agarwal,

Narendra Modi is carrying out economic reforms in the short time available to him and rebuilding a transparent and corruption free business ecosystem, destroyed by crony capitalism under the UPA. The benefits of his decisions will be slow and realized in the years ahead.

In 2014, we inherited feeble macroeconomic parameters in the form of high inflation, slow GDP growth and a weak financial ecosystem. Over the years, the nexus of politicians, financial institutions and corporate world had weakened the foundations of this structure. And, without resolving these issues, we could not have progressed.

There was no middle ground. Either we compromised and continued as such, or demolished the edifice of corruption and built a new structure. Prime Minister Narendra Modi chose the second. The pain was real but so was the malaise.

With unidentified NPA and no surety of what lay beneath the carpet, the job was tough and not for the faint hearted. Even now, the estimated NPAs are of about Rs. 9 lakh crore. Yes, there was scope for a minor deviation, but that wouldn't have been enough. Instead, with adequate provisioning and sufficient liquidity due to recapitalization, the government has managed to put banks in a position to tide over the crisis.

To understand this better, we must know that NPA has three components. Firstly, there are genuine failures arising out of business risks. Secondly, there's a large chunk of over leveraged loans. And thirdly, a whole lot of fraud is perpetrated by miscreants in the banking system. Once the gross NPA has been identified, government has to deal separately with each of these three components.

Genuine failures need hand holding and formulation of an exit policy. Fraud requires investigation and penal actions on the criminals, apart from strengthening the control and audit mechanism. Finally, bad quality loans and substandard assets need a very careful resolution so that the confidence in the banking institution is not jeopardized, and the money is recovered.

With new legislation such as the Insolvency and Bankruptcy Code, and the resolution mechanism under NCLT in place, the banking sector now has the teeth to bring fraudulent corporate houses to book.

The current banking crisis has its genesis in the UPA regime. The previous government had ignored the existence of NPA and brushed the problem under the carpet. Finally, Prime Minister Modi took the challenge head on and tried to resolve it.