Responsible Recovery of NPAs

Treating all debtors the same, including those with scope for turnaround, is bad for banks and the economy

There can be no doubt that banks need to go after the non-performing assets (NPA) vigorously so that the moral hazard of wilful default does not get hard-coded into the DNA of borrowers.

Banking thrives on the delicate psychological infrastructure of public confidence. One should also bear in mind that one of the most essential ingredient of growth is risk-taking capacity and entrepreneurial zeal.

The current hysteria being created by media and the sudden near-choking actions of the RBI towards NPA recovery seem to overlook the fact that we need a balanced approach to recovery even while preserving the above two.

Reasons for bad loans

The current stock of NPAs is the result of court actions of cancellation of licences, government not keeping its word on contractual obligations, global commodity price movements, low equity base in India, irrational exuberance in sanctions and a lackadaisical approach in the past, free-trade agreements (FTA), a sudden sinking of the growth table from 8-9 per cent to 6-7 per cent with services taking a greater share, etc.

Of these, the Asean FTAs have played a large part in pushing many units to involuntary defaults. According to one estimate, when all ASEAN countries implement their FTA commitments with India, India’s exports to them are supposed to increase by 21 per cent while India’s imports from them was slated to increase by 59 per cent (C.Sikdar and B. Nag, 2011,Impact of India-ASEAN FTA).

Surprisingly, Asean FTA, effective January 2010, remained largely unnoticed till the last leg. When the import duties on many end products became zero per cent from 2.5 per cent in 2014, it became a tipping point for the media, traders, and even the overseas exporters.

The cumulative lag in its impact weighed in heavily all too suddenly. This put the domestic manufacturing industry’s prices on import parity and several industries became uncompetitive or saw their margins shrink. In any case their ability to pass on input cost inflation became restricted. Due to this, the growth rate in several Indian manufacturing sector has sharply come down from 7-9 per cent to 3-4 per cent. This has elongated the pay back of several projects from 6-7 years to 10-12 years.

A moderated approach

Banks should carefully segregate stressed credits into (a) where Return on Capital Employed (ROCE) is still more than Cost of Capital (COC). This would indicate that the credit is still viable but less liquid than earlier planned, and (b) where ROCE is less than COC, where the feasibility itself in question.

In case of (a) the RBI should allow one-time re-scheduling of loans in line with the revised economic assumptions and the elongated paybacks, with adjustments in credit spreads, but without strangulating either the clients or banks by provisioning.

Such cases should not be reckoned as NPA in view of the general objective of maintaining a conducive atmosphere for investment. They should not be allowed to erode the confidence in our banking system and preserve the capital base of banks.

Most of current stipulations seem more appropriate for Type (b) cases. The combined might of the legal system (with its slothful, apologetic approach) and existing regulations is the weakest in cases involving immoral and wilful defaults. Immediately after the crisis of 2008, it was found that the CEOs and traders of investment banks had appropriated for themselves huge bonuses from questionable practices and structures.

The Swiss and the Swedish authorities, instead of protracted legal battles, arm twisted them to pay up a substantial part of their ill gotten gains, threatening them with the might of the State which yielded optimum and quick results.

Given that the top 60-70 cases would cover nearly 80-85 per cent of our current NPAs, the regulator, the government and the banks might do well to take lessons from such an approach and jointly ‘arm twist’ a settlement.

This approach might involve transfer of ownership in Type (b) cases to others in the industry who have competitive strengths in manufacturing, technology or distribution to make a less viable unit to fully viable one. Central Banker should have ideally asked for easy exit norms including the court procedures, automatic transfer of licences and permits instead of just concentrating on provisioning alone.

Banks should also agree on norms for lending for takeovers and mergers which is taboo as of now at least for cases involving share purchase, even if the acquirer has to pay for liabilities simultaneously.

Overly cautious approach

The contrasting approaches of the Fed to 2008 crisis as against the current scene in India is interesting. The 2008 crisis was caused by individual excesses and born of instruments created by outlandish models.

Professional excesses were writ all over and unjustified transfers of wealth humongous. Yet their approach was to save the system and public confidence and many of the sins were forgiven or forgotten, despite the effectiveness of their legal system.

Our strangulating approach of ‘one prescription whatever the diagnosis’ seems destined to manufacture a crisis out of what is at worst a matter of serious concern. This, when an accommodative monetary policy is the need of the hour, with the bulk of the economy and manufacturing sector struggling and growth and employment addition far below potential.

The excesses of strangulation can be gauged in the light of the equity that RBI holds in relation to its total balance sheet size. RBI’s ratio in this regard is the second highest in the World at 32 per cent (next only to Norway at more than 40 per cent).

The same stands at a mere 2 per cent for the US and UK. There is a clear case for a more nuanced and segmented approach, appropriate solutions for each class of cases, besides of course a re-look at the real interest rates which are at historic highs for many sectors, stubbing out any entrepreneurial spurs in the affected sectors. The high equity component in the balance sheet should be a source of comfort and assurance of the system; unfortunately RBI does not seem to know its strengths.

An edited version of this was published on March 28, 2016 in The Hindu Businessline. Link: http://www.thehindubusinessline.com/opinion/going-overboard-on-npa-recovery/article8406146.ece

 

 

Choice does not necessarily bring Welfare, Dr Sen.

IMG_0896.JPGWhen it comes to Cars I was a bit like Madhuri Dixit who claimed that ‘it is just a device to get me from place A to place B – nothing besides’. Yes she does look for comfort but does not care that much for looks, prestige, colour, gizmos, etc. It was the same with me … but only till recently.

My first five cars were hatchbacks from Maruti and Ford. I must have spent a total of fifteen minutes in selecting them – cumulatively that is. Initially there was no other choice as one would have had to deal with Ambassadors or ‘on the way out’ Fiats. Choice was about the colour alone.

My last car was a Toyota Altis. I was sort of told what to buy by my employer and so i went to the showroom and looked at the car for about 15-20 minutes mostly to familiarise myself with its features. The only choice was the colour and by that time i had had 3 blues, and 2 whites and so was sort of bored with those colours. I selected Grey.

Three – four days after i took possession, i happened to meet my boss at the office park. He asked me how my car was doing. I told him that i would have rather taken a Wagon R or repeated my earlier Ford Fusion (FF) both hatchbacks and comfortable to sit. FF also had a thicker gauge of metal so wasn’t really a problem with minor dashes and kisses while parking, so frequent in Delhi. He did not relish the answer at all. He said, ‘No. You should get a good car you see. It is necessary’. He seemed to convey much more than what he said. Guess he had played a part in upgrading my values to make it affordable even if I was otherwise ineligible.

That was my last psychological engagement with Altis. 5 years of trouble free running, faithful servant, i slowly got used to sedans and the low seating. I always preferred the high seating hatchbacks or SUVs. In fact SUVs are too high to get in and out and Crosses are better. I had never measured the mileage, never bothered to do up the minor scratches, my driver had to remind me to change the perfumes (in fact he only bought them), the garage fellow will tell me to change the tyres. The only thing that i did get worked up about was eternal cleanliness. Any deposit of delhi’s dust for more than a day would send my tempers up. I finished 5 years but was not really looking for a replacement when suddenly the break pads started giving loud noises, was not reliable any more while breaking. The workshop had started warning me in the last two visits over six months.

It was time to change the car. By this time i had seen some of my colleagues graduate their cars … significantly up to Audis and Mercs. I thought i should spend some time and make a properly researched, well informed, decision after comparing all available choices and not rush into any decisions or feel left behind.

So began my search. In the 3 months that followed i would have visited several garages of Honda, Hyundai, Toyata, Audi, Merc, BMW, Jaguar and Land rover, and Porsche (not that i could ever afford one… but gave me a nice feeling that i can get into their showroom), and Marutis… some at 2-3 different places. Spoken to 2-3 recent buyers of high end cars to get their take, … a close friend provided with a comprehensive comparison sheet of all such cars.

My first dream was the curvaceous Camry. Or the spacious Honda Accord. Someone who knew me well had suggested Santa Fe. I was told Accord has been withdrawn in India for sometime. Went to the Hyundai next door and had a look. Although i did 4-5 trips in the next month or so to get an additional car – i10, i was not impressed with their reception at all. Their complacency showed : there was 3-4 months waiting for most of their cars. I would have almost bought the new Creta if it was available off the shelf. But the minimum wait was 4 months. The beautiful Camry – my true infatuation – had given way to the feature rich but extremely geometric and boring design. One look and i decided that the lady had become wiser with age but not more vivacious. Toyota was also much like Hyundai … not too bothered. To get a test drive of Camry i had to visit them 3 times. Finally promised and when i reached apologised that they had only a car to show but not to drive … great customer care!

Then i started with the European/German Cars – Mercedes, BMW, Audi, Jaguars.   All great to drive and almost read your mind to drive but i was still hesitant on the value – money proposition till i talked to my friend of mine, a CEO of an Auto component MNC. Just a decisive sentence, ‘German cars are German cars. Don’t even entertain any doubts. It is the ultimate driving pleasure’. That done one more round, this time with prices included.

I asked my driver to chat up some of the other drivers and give me a feed on Audis. He came back with ‘people are saying there are issues with their service, Sir’. That more or less sealed its fate. I am surprised till date how so much information search and experience did not make up my mind in certain respects but a single minute 3rd party ‘expert’ feedback closed my mind on one of the dominant choice. About BMW i took some feedback from a friend, ‘Have no doubts my dear friend, don’t even have second thoughts’. Again that sealed by choice decisively ultimately. Regarding colour one of the many salesman i met remarked on my favourite Red, ‘Sir, its a beautiful colour no doubt, but your eyes tend to get bored with it in six months, and you tend to get sick with it’. That more or less sealed the colour choice for me. Mercs showroom was staid and somewhat non caring i thought and there was no sense of urgency about them. In any case the back seat width in most of their models is too narrow – I can barely place my bums, i thought.

The car arrived and it was looking gorgeous in my garage slot. Two more than middle aged business ladies who live in the same building and have never spoken to me in the past 10 years came and complimented me on the new car especially the colour. And so did some drivers in our office with some well meaning gratuitous advice on how to take care of it, etc.

After 3-4 days of gloating over it, the discomfort of getting in and out of low seating sedans was beginning to singe. I am most comfortable placing my foot flat on the floor of the car… but then the low seats don’t allow that unless you have your knees almost level with your chin. You have to stretch your feet if in front seat. Without anything to rest my foot firmly, i felt that any sudden breaks i would slide down my seat and the discomfort of resting the weight of my foot on the heels of my shoes…

To incentivise, I had told my driver that the new car is expensive and every scratch will cost me a bomb and if at the end of the year there is no scratch on the car he will get one month’s additional bonus. He is not exactly race track ready but i have never had any issues: he is as fast as any ‘stick to your lane’ driver can be. But nowadays he is a unsure wreck – looking in 32 directions every now and then before he pushes ahead.

My Ford Fusion was a bully – with its thick gauge i was not afraid of the autos, or two wheelers or other cars. I would just nose my way in, honk and elbow out others and create my way. These days when i am at the wheel, i am afraid of every auto, speeding car… motor cycles and even cycle rickshaws, nervous that they may come and kiss my vehicle… DTC busses are a menace …and in general the lower the value of the other nearby vehicle the more my scare. I have caught the virus of looking over, ahead, sideways, rear view mirror… from my driver.

And a few days into my purchase, my car was stuck somewhere and i had taken a ride with a colleague on his Ciaz. A high seating sedan, I could firmly root my foot, there was all the electronics one could think of… the rear cameras, navigation, voice recognition … big boot space with Stepney properly hidden… it appeared a superset of all features I had noticed in all other cars. All at 1/4th the price… cheap price the thing that makes most Indian mouths water the most. And my sense of regret was complete.

Conclusions

  1. i want to convey I have bought a ‘luxury’ (according to me) car and arrived in life. (Even if i didn’t say this, most readers would have concluded anyway that it is the only purpose of this article. So why should not i get the pleasure of saying it myself instead of starting with being defensive).
  2. Choice does not necessarily bring welfare, Dr Amartya Sen. You got it wrong. Some of the most happy people i have seen, come from the poorer communities, nations, neighbourhoods, families… wherever there is a sense of brotherhood, trust, stability of things, relatively stable balance of things with others/neighbours/colleagues including income and wealth, etc. (I don’t want to include ‘success’ in that category and contaminate the rest. It seems to be a bigger pollutant of happiness than wealth).
  3. I think the more the choice of goods available and we see them all and analyse each and every feature (obviously no single thing that offers all that everyone desires) the mind constructs a super set of all features at the same measly price i paid and starts suffering in comparison. Absence of choice may not have led me to these desires in the first place. I don’t know if Einstein, Chaplin or Rockfeller or Russian Czars would have ever regretted that they didn’t have the latest iPhone or Jaguars or such like. It seems so simple: ‘what the eyes don’t see… the hearts don’t grieve’.
  4. Mostly objects seem to have some high ‘utility value’ so long as they are not in our hands and the moment it comes into our grasp (or after the first use) its utility seems to plunge so steeply. The fall seems inevitable …only the rate depends … so perhaps the saying ‘a satisfied desire can never be a good motivator’. So we see divorces after 56 hours, 56 days or 8 months… objects bought with so much urgency or passion etc lying unused in our cupboards or show cases for long un-opened, books lying unread, etc.
  5. Lets not get things mixed up. There is nothing wrong with the vehicle. It has delivered almost on all parameters it claimed. 17 km per litre is a steal on diesel … it is less than ½ the cost of travel by auto for similar distances. It packs the power of a well built mid-fielder and has the languorous grace of a David Gower or Lionel Messi. At normal speeds it stalks like a tiger on the prowl and when required it lunges forward at will like a feline hunter which has decided on its particular kill. So overtakes and high speeds are not a problem if you have the stomach.
  6. It is more my core need which is to be seated with knees bent like when you are seated on your dining chair or office chair. It is the most comfortable position for me and that’s what my previous cars have ensured. When the seating gets low and i bend my knees only half, it is uncomfortable, although i gather low seating makes for a lot better stability and balance on highways and on turning. Once this is compromised i think our psyche starts screaming which only grows with time on you. All other benefits and conveniences features and comforts meekly surrender before it. I am sure the core may be different for different individuals. Unfortunately quite often i am not able to figure out what the core is exactly before the inevitable or irreversible decision or event or purchase and use.
  7. When i see Audi SUVs these days, the mind starts wandering … would it not have been a better choice…the comfort of high seating… being able to put my foot down firmly flatly, … so what if they had put a lower engine (same as in Skodas and VWs), I am not going to be racing; so what if the service is bad, the car is not going to be in the garage every day; should i have blindly relied on the Driver’s advice, shouldn’t i have thought about it myself… my mind has now to fight every reason it used to reject it in the first place.
  8. Oh! Come on. ‘But then the Audi’s front grill looks like the smile of a lady without her two front upper teeth, grinning from ear to ear. However beautiful the face, the smile – the ultimate embellishment/jewel on a human face, on such a face always looks horrible’ this is my ego defending my action. My ego the only true friend i have … never ditches me… always springs to my defence unlike my friends, wife, siblings, teachers, relatives, colleagues, et al who all ditch me for logic (the stupid logic) sometime or the other, sooner or later. Even if i were to commit a murder one day, i am sure it will still stay thick with me and be a judge who always rules in my favour.
  9. There is the core need and there are the peripherals. I think the speed and levels of satiation, frustration or disgust or boredom depends perhaps on how far out from the core the peripheral need is. With some core needs may be satiation perhaps never sets in or sets in ever so slowly like a biological process.

Finally, with all this wisdom i am still not sure if i will get my next decision right the first time. Should i have researched more. Perhaps yes. But then more knowledge is what seems to have led to dissatisfaction, discomfort and regret in the first place … so what will it achieve but the opposite. May be lack of choice leads to more happiness … but i am not sure if i am there yet. But it looks like the absence of too much external stimuli and temptations by way of alternatives enables me to discover and stay close to my core need. Or discover myself better. If true i pity the rich… poor souls!