Should banks be given incentive to clean books?
Banks seeking incentive from RBI to clean bad loan is not only an atrocious idea but also against the basic ethos of banking.
Just as lending and mobilising deposits have been the core functions of banks, recovery of loans from borrowers is equally significant. In fact, in absences of demand for loans and easy flow of money to banks as deposits (due to demonetisation) recovery of dud loans has emerged as the core activity for a number of banks.
Of the total loans given by banks to borrowers, 20% of the loan is not paid back to banks. In banking parlance they are called non-performing loans or bad loans- loans on which borrowers does pay their dues for over 90 days from due date. These bad loans have dented banks earnings with a number of them showing historic losses. The combine results of all PSU banks show Rs 190 crore loss, which is solely due to NPA problem.
Banks do not earn any income on these loans, but in order to protect the return they promised to their depositors, banks have to keep aside their earnings, also known as provisions, that serves as a buffer in case they fail to get back their money.
It thus imperative for banks focus on getting back their money from the errant borrowers as soon as possible. Banks like IDBI Bank has abandoned lending activity and are focusing on recovery. And probably they realise that this is the only way to stay afloot.
Banks are unlikely to make any money from treasury operations in fourth quarter since most of the trading gains have been eroded with the rise in g-sec yields. As a result, a number of PSU banks, which has 70% market share, are staring at huge losses in fourth quarter. The white knight, the Life Insurance Corporate, too will not be able to support loss making banks trash is time as their board will question such investments.
In such a situation, when a senior executive from the country’s largest bank, State Bank of India demanded last week that RBI should give lenders incentives to clean their books, it goes to point that lenders are still not clued to ground realities.
Not long ago, a number of bankers had to forgo their bonus, perks and income due to poor performance of banks. And the way bad loans are piling up, seeking incentive for resolution of loans is similar to seeking incentive to stay afloot.
To be fair to lenders, recovery of loans is no doubt the toughest among all the banking activities. First the system is heavily loaded in favour of borrowers considering the numbers of years it takes to recover through the legal channel. For instance after four years of litigations, banks received approval from the DRT to auction assets of Zoom Developers that have defaulted to the tune of Rs 3000 crore. Secondly, for a banker, it is easier to meet lending targets and make a case for promotion than to meet recover targets, since borrowers are constantly creating legal hurdles. Lastly, it is impossible to recover the full amount (otherwise its would not have turned sour). So the tricky question is the amount of haircut that a banker should take so that they are not be questioned by investigative authorities in years to come.
Incentive by itself will not be enough, an efficient judiciary is what the bankers should lobby for.
Just as lending and mobilising deposits have been the core functions of banks, recovery of loans from borrowers is equally significant. In fact, in absences of demand for loans and easy flow of money to banks as deposits (due to demonetisation) recovery of dud loans has emerged as the core activity for a number of banks.
Of the total loans given by banks to borrowers, 20% of the loan is not paid back to banks. In banking parlance they are called non-performing loans or bad loans- loans on which borrowers does pay their dues for over 90 days from due date. These bad loans have dented banks earnings with a number of them showing historic losses. The combine results of all PSU banks show Rs 190 crore loss, which is solely due to NPA problem.
Banks do not earn any income on these loans, but in order to protect the return they promised to their depositors, banks have to keep aside their earnings, also known as provisions, that serves as a buffer in case they fail to get back their money.
It thus imperative for banks focus on getting back their money from the errant borrowers as soon as possible. Banks like IDBI Bank has abandoned lending activity and are focusing on recovery. And probably they realise that this is the only way to stay afloot.
Banks are unlikely to make any money from treasury operations in fourth quarter since most of the trading gains have been eroded with the rise in g-sec yields. As a result, a number of PSU banks, which has 70% market share, are staring at huge losses in fourth quarter. The white knight, the Life Insurance Corporate, too will not be able to support loss making banks trash is time as their board will question such investments.
In such a situation, when a senior executive from the country’s largest bank, State Bank of India demanded last week that RBI should give lenders incentives to clean their books, it goes to point that lenders are still not clued to ground realities.
Not long ago, a number of bankers had to forgo their bonus, perks and income due to poor performance of banks. And the way bad loans are piling up, seeking incentive for resolution of loans is similar to seeking incentive to stay afloot.
To be fair to lenders, recovery of loans is no doubt the toughest among all the banking activities. First the system is heavily loaded in favour of borrowers considering the numbers of years it takes to recover through the legal channel. For instance after four years of litigations, banks received approval from the DRT to auction assets of Zoom Developers that have defaulted to the tune of Rs 3000 crore. Secondly, for a banker, it is easier to meet lending targets and make a case for promotion than to meet recover targets, since borrowers are constantly creating legal hurdles. Lastly, it is impossible to recover the full amount (otherwise its would not have turned sour). So the tricky question is the amount of haircut that a banker should take so that they are not be questioned by investigative authorities in years to come.
Incentive by itself will not be enough, an efficient judiciary is what the bankers should lobby for.
