NPA needs to be delinked from criminality and treated as part of the normal banking function

I was appointed as the Government director on the Board of Indian Bank in 1999, which had a negative net worth at the time. Had it not been a public sector bank, the regulator (Reserve Bank of India) would have recommended its closure.

Owing to the fact that the Government is the lender of last resort, public sector banks are allowed to function; they get the required capital support from time to time. It was during the same period that an expert committee of the Planning Commission, under an international expert who later became the RBI Governor, identified three banks as weak banks—Indian Bank, UCO Bank, and Punjab and Sind Bank — recommended their closure.

Despite the fact that it was not within the jurisdiction of the Planning Commission to have taken up such an exercise, recommendations of the expert committee hit the headlines and were discussed at various forums; these were seen as necessary to strengthen the Indian banking system. Even the Narasimham Committee, appointed by the Government for the banking sector, did not recommend such a closure of the so-called weak banks. The RBI and the Finance Ministry acted correctly by not examining the expert committee report and ignored it.

The Government has superseded the boards of weak banks to improve their performance. At that time, in Indian Bank there were only four directors — an RBI nominee, a Government nominee, a CMD, and an ED. A non-local CMD was also consciously appointed in these banks. The newly truncated Board has the specific task to revive the bank in a defined time frame. In the first meeting of the Board of Indian Bank, it was informed that the bank was not extending any credit due to high non-performing assets (NPAs) in its portfolio and the board was almost non-functional.

Bank loans are assets and deposits are liabilities. Banks cannot survive on liabilities. Narrow banking, earlier adopted and newly launched payment banks, have yet to prove effective. At the Board meeting, when asked about the NPA account not being settled, it was informed that most of the cases were referred to the CBI and were under investigation. So the bank was not doing anything, despite the fact that many of the cases were reportedly backed by substantial assets or performance securities. There was a fear on the part of the management to enforce these and realise the outstanding amounts.

At the second meeting of the Board, I mentioned that the CBI will look into criminal offences and will not be able to help recover the outstanding amount. The bank shall close and realise all NPA cases based on assets and security available. The CMD was reluctant and stated, “What will happen to my career? Will the CBI not object to this?” The RBI nominee did not oppose the proposal. The CMD was, however, later convinced that it will be the joint responsibility of the entire Board and she alone could not be held responsible for the decision of settlement.

It was emphasised that the bank's revival was closely dependent on addressing the bank's NPA. The government was also unlikely to provide capital support with such a high NPA. Fortunately, everyone in the Board agreed to the proposal. In the next six months in the bank management committee and Board, the only agenda was approval of the settlement proposal of the NPA cases. All accounts, whether referred to the CBI or otherwise, were settled based on the security assets available in each case. The books were cleaned and the bank began lending again, while the Government provided capital infusion under a restructuring proposal.

The enthusiasm of the bank's officers and staff increased significantly and their commitment to the revival of Indian Bank was noticeable. A leading public sector bank in the country, Indian Bank is listed on stock exchanges. Its market cap is better than many other banks. Revival of Indian Bank is a case study, aptly elucidated by the ex-CMD in a book written by her.

During the Indian Bank revival period, the Government appointed an “oversight committee” of experts from outside (private sector) to guide the bank Board. In the first meeting the oversight committee had with the Board, they came up with suggestions to wind up operations in Singapore and sell some more assets of the bank. These suggestions were rejected outright by the Board.

The oversight committee complained to the RBI and the Finance Ministry about the lack of cooperation from the Board. I explained the views of the Board to the Ministry and the RBI; fortunately for the Bank, the oversight committee never again made suggestions to the Board.

The bank was once considered weak, fit for winding up, but now stands out as a shining example of a successful bank in India. As a result, NPAs can be viewed as an integral part of the banking sector and should not be considered criminality. In private banks, NPAs are manageable: they restructure, compromise, or write them off on time. In public sector banks, it is mandatory for banks to refer a case of NPAs to the vigilance department. This delays the settlement process; the underlying assets and securities get stripped due to this and the bank has to make full provisions (even if there are underlying assets).

NPAs are related to the economic growth cycle, technological changes, and regulatory considerations. Banks need to appreciate all these on a case-to-case basis and take a view regarding restructuring, compromise, settlement, etc. These conditions of referring cases to vigilance are unnecessary; they obstruct the bank in resolving the NPA issue in a timely manner. All decisions of this nature are made by the management committee, which includes the RBI and government nominee as well as the independent director. (RBI nominees are not appointed as of now).

The 1990s were a difficult decade for public sector banks. Nationalisation in 1969 and then in 1980 brought banks under the Government. The change in managerial character impacted their functioning. Many positive things happened. Bank lending was linked to the Government vision of promoting an equitable society with access to credit; hitherto neglected sectors were categorized as “priority sectors.” Forty per cent of the total credit was mandated to be extended to priority sectors which included agriculture and MSME—the backbone of the Indian economy.

However, Government control influenced the banking sector's health and contained the adoption of cutting-edge technology and products to meet the aspirations of the emerging population. It was mainly after the emergence of private sector banks that provided quality service to customers that the public sector banks started to reform.

They adopted technology with greater focus on customer service. There is no doubt that the quality of officers and staff is very competent and capable in public sector institutions; the problem is with the lack of flexibility and incentives. Bank managements should be allowed to deal with NPAs; CBI and CVC should not become burdens for them.

Banks have their own vigilance departments which can address all such matters. NPAs in banks need to be delinked from criminality and treated as part of the normal banking function. Accountability must be defined at every stage of the loan.

It is time to provide a level-playing field to public sector banks.

(Retd IAS, former CMD, CSC e-governance, Ministry of Information Technology)