To address the problem of Non Performing Assets (NPAs), banks must maintain strict vigilance during pre and post-sanction procedures of loans and never make compromises in due diligence processes, Vice President of India M. Venkaiah Naidu said Friday. Lenders must constantly strengthen their internal processes to effectively monitor funds and maintain strict discipline in lending.
“Banks can make use of technology and data analytics to identify the early warning signals of loan defaulting and evolve robust mechanisms to identify the hidden NPAs. They must focus on nurturing internal skills for credit assessment and undertake forensic audits to understand the intent of the borrower,” he said at the 125th Foundation Day celebrations of the Punjab National Bank (PNB). In the last few years, gross NPAs of banks as a percentage of total loans have increased from nearly 2 per cent of total loans in 2008 to nearly 10 per cent in 2017, he said. Rising NPAs adversely affect growth as they reduce availability of funds. The government had to announce a Rs 2.11 lakh crore capital infusion plan to ensure that public sector banks come out of the NPA mess and are able support growth through expansion in credit.
“The accumulation of bad loans happened over a long period of time, and now, it threatens to hamper economic growth by weakening the credit supply channel of the economy. Some of the factors leading to the increased occurrence of NPAs are external, such as decreases in global commodity prices leading to slower exports. Some are more intrinsic to the Indian banking sector,” he said. He argued that time has come for a systemic reform of the Indian banking sector. “There has to be an effective and efficient system of checks and balances in place so that the loop holes in the system are not taken advantage of. We must also take a re-look at the practice of financing big-ticket projects which have long gestation periods and hence face cash flow issues, through deposit-taking commercial banks,” he said.
No efforts should be spared to deal with wilful defaults and frauds. India must enter into more treaties for exchange of information and intelligence on financial fraud and bank accounts and work with international agencies in bringing defaulters to justice, he said. Speaking at the event, Punjab National Bank MD and CEO Sunil Mehta said the banks worked hard to come out challenging phase. PNB was stung by over Rs 14,000 crore loan alleged loan fraud last year by diamond trader Nirav Modi. Talking about bank’s resurgence after a lean patch, Mehta said, “last year was a challenging year for us. Putting the past behind all toiled hard to ensure that the bank returned to profitability in just 9 months.” Naidu also said populist schemes like loan waivers and free power are not long term solutions for problems of farmers. “Everything free…free power means no power. People wants assured power, they want regular power and then loan waiver scheme. They are not going to help the farmers in the long term because this is not the end of the story,” he said.