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Money & Banking - Non-Performing Assets

`NPA management must focus on recovery'

C.R. Sukumar

The total NPA provisioning during the last three years has been in excess of the collective net profit of the PSBs, says an ARCIL study.

Hyderabad , July 8

THE public sector banks (PSBs) have reported net non-performing assets (NPAs) at less than three per cent for the fiscal ended March 2005. This achievement has been attributed to the resilience and strength of the banking system, which is gearing up to embrace international best practices.

The banks have been able to report lower NPA percentage mostly by providing against or writing off NPAs.

According to a recent analysis of Asset Reconstruction Company (India) Ltd (ARCIL), the total provisioning made by banks during the last three years has been over Rs 70,000 crore. The total NPA provisioning during the last three years has been in excess of the collective net profit of the PSBs.

ARCIL is of the view that, "Reporting reduction of net NPAs through book management is not enough. Recycling of capital is crucial for robust economic growth. ARCs (asset reconstruction companies) provide excellent mechanism to the financial system by assisting banks/FIs in tackling NPAs which are complex in nature on account of multiple lending or are small individually but large in numbers ."

According to ARCIL, a better parameter of banking system would be the level of gross NPAs. The provisioning against NPAs merely reflects the application of capital (blocked through provisions held against NPAs) to unproductive uses. This also increases the cost of intermediation and proves a drag on efficiency. The gross NPAs of the PSBs were higher at over Rs 90,000 crore as on March 31, 2004.

"NPAs constitute a real economic cost to the banking system and must be put on recovery path to release the blocked capital. A better parameter to assess the progress made on the NPA level would therefore be to look at recovery progress. In our view, insufficient progress has been made on recoveries at least in respect of large cases which account for about two-third in value," the ARCIL report said.

At present, only stronger banks have been transferring their NPAs to ARCIL. Some banks have adopted `wait-and-watch' approach for reasons such as weak book position and issues relating to moral hazard. This approach has delayed the implementation of resolution strategy in several cases causing value loss to the system.

Another key reason for banks not showing interest in transferring their NPAs to ARCs is that the book value of the NPAs they are holding is higher than the `market value'.

To address this problem, ARCIL has suggested operationalisation of some more ARCs to enable the banks/FIs to benchmark the sale price of NPAs . So far, ARCIL has acquired around Rs 16,500 crore total dues from banks/FIs, comprising principal debt of Rs 8,100 crore and interest and charges of Rs 8,400 crore applied till the date of acquisition.

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