Bank reforms target small fish

At present, non-payment of interest for two quarters will make an account NPA. These norms are being tightened. Banks have been asked to adopt 90 days8217; norm for recognition of loan impairment as against the current norm of 180 days. From March 2005 the transition period of sub-standard asset to doubtful category has been reduced to 12 months from 18 months.

Many units across the industrial spectrum which have kicked off operations with bank borrowings are at their wit8217;s end. Scores of them have the inclination but not the wherewithal to meet repayment obligations on time. They find themselves trapped in a vicious circle for a variety of reasons 8212; obsolete technology, mismatch of input-output ratios, recessionary economy and even locational disadvantages. With liberalisation, these hapless units, instead of facing a level playing field, are at the receiving end.

A promoter of a struggling company who has availed of bank finance thunders: Why punish genuine borrowers when the big fish are let off with impunity? He apprehends that the recent Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002 will be used against smaller corporates even as influential defaulters go scot free.

Indeed, NPA recovery yields multiple benefits like the ability to recycle funds in other earning assets, reduces provisioning requirements, improves gross and net profits of the banks. So banks and financial institutions have an axe to grind. But borrowers ask if it is not prudent to have a different yardstick for borrowers genuinely in difficulty.

Given that there are tell tale signs and that accounts do not become NPA overnight, it should be possible for the system to segregate the genuine borrowers from the black sheep. Said a borrower: 8216;Hang me if I am a wilful defaulter, or else resuscitate me by pumping oxygen8217;. In other words, once the bona fides of the borrower is established, the bank must try to help him with finance and expertise, rather than stop financing mid-way.

A couple of bank chairmen who this writer spoke to admitted the need for banks to have a human face, suggesting that NPA recovery should be done on a case-to-case basis, keeping in mind that the banks cannot absolve themselves of their duty as an important stakeholder, whose loan funds are driving the business enterprises, to nurse the units back into health. For this, restructuring may be called for, or interest waiver or concessions can be done, apart from infusing fresh funds, provided one is sure that the unit in question is finding itself in a spot which is not of its own making and that it will come out of the woods within a reasonable time span. Sometimes accounts have become NPA due to underfinancing by banks as also due to improper credit assessment and failure to afford timely assistance.

The fear is that with banks and institutions introducing a stricter regimen, small and medium enterprises 8212; the backbone of Indian industry 8212; will be starved of funds. And since they have no recourse to market borrowings or other internal funds, it will sound their death-knell.

It is time the RBI took note of these developments and put in place a proper mechanism in line with the government8217;s avowed policy of encouraging investment and industry. Instead of tightening the loan impairment recognition norms further, it is as well the RBI maintains status quo and gives a breather to borrowers till such time as Indian industry comes of age. While doing so, it must take into consideration accounts which have been adequately covered by securities. Let there be no summary trial.

The writer is business editor of 8216;The New Indian Express8217;