“The top 30 defaulters are sitting on bad loans of Rs. 95,122 crore, which is more than one-third of the entire NPAs of public sector banks.” That is the tailpiece in an article in the Economic Times of June 11, 2015, titled “RBI in favour of developing better strategies to deal with bad loan problem”. That also happens to be the standard quote in the flood of articles on the NPAs which collectively have grown into an irrepressible demon forming a huge negative attribute for the group of brands called public sector banks (PSBs) – tarnishing effectively all the good aspects about it, whatever there are.

Bad loans with the PSBs have grown so huge and are still growing uncontained with surprisingly large provisions quarter after quarter which only suggests that the govt perhaps is not yet overwhelmed by the precarious situation of these banks, done into by the swelling bad loans. The huge size and the regularity of its accrual with the root causes never clearly explained only lend credence to the hunch on possible entrenched systemic criminal drainage lines beyond genuine economic and social factors.

The issue has only hardened over time and the stubbornness of the suspected factors that have caused bad loans in the PSBs is evident in the failure of the banks in responding with successful remedial actions to the heightened concerns about it (NPAs) raised perpetually in the media, more pressingly in the past three-four years. That also tells of these banks being organizationally insensitive to demands on performance and also of certain helplessness on the part of those directly responsible for fixing this inefficiently managed situation.

The fact however is that the very size of the doubted debts is troubling and now even to the laymen on the banks who for sure would have never ever expected to have to think of it ever. That a certain alarming situation in a complex, knowledge critical and paired with the economy sector is reduced to active concern loaded discussions in the general media is by itself a good measure of the deficiency in the management of these banks. And these banks, with about 70% share of the sector, being all controlled (managed?) by the government, the responsibility too – to explain and correct the situation – remains squarely with it and its agencies forming the government’s governance assurance system in the sector.

NPAs of PSBs seem to convincingly prove the fact that real costs and damages are highly subjective to situations and often happen to be elusive to even professional analysis. I believe the government is way past the opportune time to think of containing the huge consequential costs – consequential to not effectively addressing the issue of bad loans for so long. In fact, such ignored costs which are not normally defined and hence hardly considered have been weakening the PSBs for quite too long now. Continued excessive flow of bad loans is one such huge and growing cost. The other big cost is the intangible, and therefore hard to sense, cost of top management in all these banks whose considerable good attention and time are spent on these wasted accounts at the cost of work on strategizing for ensuring positive economical and social impact from their operations. Ironically, if the corruption case at the CMD level at Syndicate Bank is, even if slightly, indicative of the kind of compromise down the line, as always rumored, a good part of the bad loans seem to have been rather created than to support the belief that  they have happened for other reasons. Low staff morale, declining staff efficiency, deficient employee loyalty and possible surge in the internal frauds for which these banks are known for, year after year, are the other costs uncontrolled bad loans trigger. Another cost bigger then all other costs is the cost of capitalization funds needed by these banks to be able to remain afloat. With the bad loans pulling down the net worth of these banks and thus pushing possible investors away govt would have to pay out of the scarce public money in ineffective bits for the chance of inefficient returns.

Therefore, the most important task for these banks is to make unbiased lessons from the mountain of bad loans primarily to be able to drastically cut further generation of bad loans, at least those that stem from evil connects, deficient methods and flawed practices.

Here are some specific management perspectives on the most essential steps govt needs to take to avoid the distress turning into dismay:

Much of this Rs.95,122 crore with 30 defaulters and a good part of the rest (about 1.65 lakh crore out of the total of 2.60 lakh crore as on December 2014) sounds misleadingly as ‘all-lost’ and therefore calls for classifying appropriately to know what to do with it, bit by bit, at least of those that are declared as NPA in the last three years. Understandably, the new stringent provisioning conditions have caused the current surge in the bad loans which however puts a good part of it with better chances of recovery.

More than the chances of recovery and restructuring the lessons that can be learnt from analyzing these accounts in depth and with investigative approach would surely help the managers in these banks to know their trade better. A good part of bad loans can be attributed to ignorance on the part of these banks; of finer aspects of failing businesses and of the tricks of smarter managements in drawing money with clever arguments and dishonest arrangements. The group of banks that lent to Kingfisher Airlines did so buying the argument that its (the airline’s) extrapolated revenue potential largely derived from its popular parent brand ‘Kingfisher’ as its brand value which in fact, from the branding perspective, was just ‘nothing’ and thus the banks ended up with a brand with zero collateral value.

Contrary to popular perceptions in the sector good banking ought to be about lending against business potential and not essentially against full collateral security – at least by the spirit of it. The shallow conviction in practice explains the excessive lending by these banks for home (additional) buying and beyond limits to the builders as well, unmindful of the undue support they provide to them (builders) in driving up the prices in the sector. But to be able to lend on the strength of business potential banks need to learn finer aspects of the businesses across sectors they wish to lend in. To be able to lend against brand value banks need to have a good understanding of the term in the first place. The careless lending to Kingfisher only tells; they don’t.

Only way to be able to learn the possible lessons from the lot of bad loans is to transfer the work of dissection and micro management of all of it (NPAs) of all the PSBs into a consortium professional unit established with all the expertise, hired suitably, to decipher and deduce most appropriate decisions on each, which would also help managers at these banks to focus on steps in curbing practices and mending misconceptions that let loans turn bad and thus effectively avoid NPAs in the future – at least the flood of it.

Very obvious ones among the likely reasons for this mountain of NPAs are; i) lending to projects which are not fit case for lending by banks. Some of the large loans to infrastructure projects prove this point, ii) big and wealthy groups and individuals ‘managing’ loans out of banks ‘out of contacts’ many times in excess of allowable limits – ‘freeloading’ as termed by the RBI governor, iii) lack of abilities on the part of banks in understanding business fundamentals beyond collateral security and run of the mill feasibility reports, and iv) outright fraud cases.

Quite possibly, a good many of them (rundown businesses) would thrive in suitable hands (promoters) and traded competently – by the consortium – can make good for a lot of sure dead ones. Most of the later NPAs can possibly be resurrected and some may even turn in profits on sale.
 
Fear is the key – some ‘hot pursuit’ of the borrowers of good many of these loans would lead to ‘deceit plans’ that started the loans only to turn it bad. Some real casualties happening in quick time would surely have the impact in terms of drastic reduction in the new NPAs in the next four quarters.

Lastly, it is the ‘opaque’ systems, the ‘who cares’ attitude and the third party handling that produce NPAs at these banks. Unless the lessons from the current lot are made and learnt in quick time the banks would only continue to produce them (NPAs) routinely.
As the RBI governor has feared; “NPAs may not have peaked yet” and that tells of the huge risk PSBs face but may not have the strength to bear.

Also read: Six innovations banks should try

But, would the government act fast – earnestly and decisively? Hard chance, considering the time it is taking to even fill up vacancies in the top management slots.