"Never let a good crisis go to waste". These famous words may well be what has been the driving force behind the recent concerted effort by the Reserve Bank of India and Indian banks as they go on the front foot in their fight against non-performing assets.

The promise of 'achhe din' may be music to ears of investors but have not brought any relief from the dark 'non-performing asset' cloud that continues to linger over the banking universe in India. At a time when banks must be looking to grow at a multiple of GDP, the lenders are busy cleaning up their past mistakes that continue to weigh on profitability, capital and growth.

As per preliminary data from the RBI, it indicates that gross non-performing asset ratio stands at 4.45% for the banking system while net non-performing asset ratio has risen to 2.36%. However, stress asset ratio, which includes NPAs and restructured loans, is at a whopping 10.9%, with public sector banks seeing greater stress.

But, there is a beautiful silver lining to this dark cloud. With their backs against the wall, banks have found much needed support from the RBI with regulatory changes galore. RBI has joined the NPA battle with tighter definitions on wilful defaulters, regulatory encouragement for loan and fraud data sharing, creation of registry of frauds by the central bank, identification of non co-operative borrowers and even working with SEBI to restrict fund raising avenues for defaulters.

On taking charge as RBI Governor on Sep 4, 2013, Raghuram Rajan had warned that defaulting promoters have no "divine right" to stay in charge of the company, and that banks must be more proactive in recovery efforts. In the last few months, Rajan has continued to tighten the space for errant corporates and even restricted the space for banks to delay bad loan recognition by using the easy method of restructuring.

Banks are also taking a strong cue from the regulatory support and are using technology, working with co-lenders, using 'name and shame' techniques and employing social media to target defaulters. With banks' reputation on the line, large banks such as State Bank of India has now tied up with a technology partner to create an 'early warning system' for identifying potential bad loans. With RBI's push, banks are now actively sharing data on stressed assets and pooling resources via joint lending forums. Many banks are using social media to identify and track down education loan and other defaulters and thus enabling recovery. Banks are now showing less reluctance in naming and shaming even large corporate defaulters in courts and in mainstream media which works as a good pressure tactic to get errant borrowers on the negotiation table.

From a phase where banks were often at the mercy of influential and large companies for loan recovery, the RBI support has provided Indian banks with the much-needed regulatory ammunition to take the fight to the defaulters who make hay with public money.

The shoe is now firmly on the other foot, and it will be no surprise to see Indian banks come out of this weak phase, not just stronger but also wiser.


By Editorial Team

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