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Banks wage war against defaulters in 2001, FIs prepare for universal bank

Banks virtually waged war against loan defaulters in the year 2001 to tackle the chronic problem of non-performing assets, now at Rs 566 billion, even as financial institutions pleaded with the government for bailouts and to start preparation for transition to universal banks.

"Willful defaulters should be jailed," an angry Finance Minister Yashwant Sinha said after reviewing public-sector banks, whose financial health has been suffering under piles of non-performing assets.

Sinha asked banks to adopt a 'twin approach' of stringent action against defaulters while providing reliefs to small borrowers who were eager to pay back the principle amounts.

The government also mooted an asset reconstruction company (ARC) with a capital of Rs 2 billion while encouraging HDFC and SBI (State Bank of India) to set up credit information bureaus for disseminating information to banks about potential defaulters.

The Centre also sought to bring legislative changes through insolvency and securitisation bills to enable banks and financial institutes to recover their loans faster and reduce NPAs.

The gravity of the problem can be perceived if one considers the thinning of profit margins on account of higher NPA provisions and tightening of asset classification rules by central banks worldwide including RBI in the near future.

A snapshot view of banks reveals that SBI group's gross NPAs mounted to Rs 210.54 billion, which is 37.2 per cent of Rs 566.08 billion accumulated by all the PSU banks till September.

SBI alone amassed Rs 160.69 billion gross NPAs while its net NPAs were at Rs 63.46 billion or 6.0 per cent of its advances.

SBI was followed by Bank of Baroda with gross NPAs of Rs 40.34 billion, Punjab National Bank (Rs 36.72 billion), Bank of India (Rs 36.29 billion) and Central Bank (Rs 32.40 billion).

Canara Bank, Dena Bank, Indian Bank and Union Bank of India also had gross NPAs of over Rs 20 billion.

While the larger banks could absorb the shock better, NPAs also plagued the financial health of half a dozen weak banks.

In percentage terms, Dena Bank topped the list with gross NPAs of 26 per cent of its advances, followed by United Bank of India (21 per cent), Indian Bank (20 per cent), Punjab & Sind Bank (19 per cent) and Allahabad Bank (17 per cent).

The ongoing economic slowdown may be responsible for temporary fiscal disorder of FIs but the habit of not paying back loans is incurable and the NPAs amassed as a result have been slowly crippling India's financial sector.

IFCI, whose NPA amounted to over 20 per cent last fiscal, decided to crack down on defaulters.

"We have filed over 100 legal suits against defaulters. We have also issued 33 recovery certificates to specialized agencies to recover loans," IFCI chairman V P Singh said.

Banks too have initiated similar moves, albeit silently and on a less aggressive scale, after RBI's one-time settlement scheme failed to yield desired results.

Allowing banks to continue with their own OTS schemes, Sinha asked them to take the help of Lok Adalats to settle claims from borrowers apart from the conventional methods through the debt recovery tribunals.

Notwithstanding the difficult situations, some of the weak banks approached the government for bailouts.

The government, however, told the weak banks to fight their NPA-wars till the last breath.

2001: The Year That Was…
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