The document discusses several options to address India's rising NPA problem in the banking sector. It argues that the situation is not as alarming as portrayed since banks have high reserve requirements and only a portion of reported NPAs will actually result in losses. Several initiatives are proposed to expedite the NPA resolution process, including allowing the sale of companies as going concerns, flexible accounting rules, and promoting strategic management rather than just legal/financial approaches. Public sector banks could also generate funds by selling excess real estate assets. Overall a coordinated effort is needed between the government, regulators, and banks to reduce NPAs and restore the banking system's health.

1. NPA resolution in India – The way forward
The image of the Indian Economy has taken a beating in the recent past after developments
in the area of Bank Management, Bank Governance and NPA management. There is news,
every day ,about new developments in the NPA management. The regular inflow of news on
NPA has created an impression that our banking system is in a very bad shape.
The situation is not alarming, as it is made out to be. India has got one of the highest reserve
requirements in the world and banks have to invest significant part of their deposits in the
Government and safe securities.
The entire amount reported as NPA, is not a total loss for the banks. If diligent and well
thought out strategies are adopted, then , it would be possible to recover more than 60% of
the NPAs. All the Public Sector Banks in India have many undervalued assets in the form of
Real estate in Prime locations in India. Further, the investments they have in Shares of
public listed companies , will have a much higher market value than the value reported in
Books. Many of these banks, have subsidiaries engaged in the business of Insurance,
Housing Finance , Securities Management ,etc. The value of these investments would be
much higher than what is reported in the books of accounts.
Indian Economy is still very strong growing at more than 7% p.a . The savings rate of 30%
alone is $ 750 bn , a very large amount considering the banking system. Further , the
banking system has only about 12% of the total assets of the economy. In all these years,
about 88% of savings was invested in immovable assets including gold, real estate and
others. The value of these assets are very high. Auto sector, which contributes to 10% of the
manufacturing in India, continues to grow at more than 10% and many sectors in India are
still growing at more than 10% p.a , one of the highest in the world.
Considering all these factors, the investors need not press the panic button and say , all that
has come to an end. In fact, this is the right opportunity for genuine investors to draw plans
for aggressive growth of their businesses.
Many new initiatives were taken by the government in the recent past to resolve the NPA
issue. The recent decision to allow companies referred to NPA resolution to even consider
the option of selling the company as a going concern will go a long way in expediting the
process. The following further options could be considered apart from using the present /
legal frame work to resolve the NPA issues.
Even, this week, government has allowed banks to set off the losses on account of treasury
operations of banks over four quarters instead of a single quarter. The implementation of
Ind – AS has been postponed. In cases, where the resolution process has started, banks have
to provide only 50% of the value for NPA for accounting purpose.

2. For Industries /Companies affected by Policy issues. Government can set up a working group
for each Industry to prepare action plans to make the industry competitive again. The action
plans could address , change in the legislation; policy ; licensing; pricing and competition
issues. The groups set up could come up with suggestions within a month and the action
plans could be implemented within a time frame of three months. Wherever legal
provisions have to be changed, ordinance could be passed.
1. In the case, where, the companies have mismatch of cash flows and for technical
purposes, they are reported as NPAs, the provisions could be reviewed and they
could be amended to revise the accounting norms. If a unit is able to prove that it
would be possible to repay the instalment within six months of the due date, if it is a
NPA, as per technical approach, the account could be excluded from addition to
NPAs.
2. The primary objective of NPA resolution process is to recover NPAs. As and when
the units are referred to authority, in many cases, if there is a company ready to
settle the full amount, the recovery could be made and the resolution process could
be terminated. Detailed due diligence process could be done away with.
3. In cases, where , the promoters have the ability to repay and they have enough
assets to repay, with the help of investigation and the compliance agencies, through
a discussion with the promoter resolve and if the process does not work, then, the
legal course of action could be pursued. Indians by nature, will be very conscious
about the reputation in the society and when they are convinced by conciliatory
approach to settle issues, many of them will come forward.
4. In every sector, even in sectors which are not doing well, there are best companies
with good operating and financial performance. In cases, where the sickness is
related to management issues, the companies could be taken over by Banks and the
management contract could be given to these leading companies to improve the
performance with a profit sharing approach. In these cases, the sick companies
would be able to derive synergies from the best practice and economies of scale.
5. So far , the approach to resolution was focussed mainly on legal and financial
aspects. A focus on strategic management to resolve the issues, change
management would help in developing a competitive operation going forward.
6. Apart from addressing the distressed assets, Public sector banks have large real
estate assets. Especially, the residences could be sold to generate cash. Many of the
branches of PSUs have large space. Considering the technological developments,
ideally, they would be requiring only 25 – 30% of the space , they occupy. The
branches could be redesigned and the space could be optimally utilised. The extra
space could be used to sell , other financial products, consumer loans with Durables

3. and Automobiles, which can generate , lot of fee income. Banks can also sell other
assets which are not core to the banking operations.
7. RBI. There has to be a continuous monitoring required. All the branches should send
their weekly NPA reports to the Corporate office of Banks. Every bank, should send a
consolidated report of NPAs to RBI , every month. In RBI, bank – wise, company –
wise / Customer – wise / NPA details could be consolidated. Considering the
advancements in Technology , it should not be very difficult to prepare these
reports.
8. In RBI, A senior level officer , could be in charge of NPA monitoring and well staffed
department to Monitor NPA could be set up in RBI. The consolidated reports
generated by RBI could be shared with the Banks, Ministry of Finance, Ministry of
Corporate Affairs and SEBI. Based on the reports, from time to time, guidance could
be sent to the banks. At a Bank level, a GM level person could be in charge of NPA
monitoring. This department will be different from Special asset Resolution
Department. The main role of the department is to identify and report NPA at
regular intervals.
9. Legal process. In India, any procedure, which has to undergo legal process always
takes time. In the light of this, the scope for resolving the NPA issue without legal
process could be looked at as the first option. This will save time, money and
uncertainty in the result of the process.
In addition to the present action plans by Government / RBI, implementation of some of the
above action plans would help to reduce the NPA level and bring back the Banking system to
black again. To achieve, there has to be a very good coordination between Government
Stakeholders , all the related Regulators and the banks.
( This is the opinion of the Author and not the Company he is working for ).
R.Kannan
Head – Corporate Performance Management
Hinduja Group