NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the midst of turbulent structural changes overtaking the international banking institutions, and when the global financial markets were undergoing sweeping changes. We have already discussed these changes in detail in an earlier Chapter. In fact after it had emerged the problem of NPA kept hidden and gradually swelling unnoticed and unperceived, in the maze of defective accounting standards that still continued with Indian Banks up to the Nineties and opaque Balance sheets.

In a dynamic world, it is true that new ideas and new concepts that emerge through such changes caused by social evolution bring beneficial effects, but only after levying a heavy initial toll. The process of quickly integrating new innovations in the existing set-up leads to an immediate disorder and unsettled conditions. People are not accustomed to the new models. These new formations take time to configure, and work smoothly. The old is cast away and the new is found difficult to adjust. Marginal and sub-marginal operators are swept away by these convulsions. Banks being sensitive institutions entrenched deeply in traditional beliefs and conventions were unable to adjust themselves to the changes. They suffered easy victims to this upheaval in the initial phase.

Consequently banks underwent this transition-syndrome and languished under distress and banking crises surfaced in quick succession one following the other in many countries. Elaborating a cross-country description of this phenomenon a study by FICCI depicts as under:

"Since the mid-eighties, banking crises have come to the forefront of economic analysis. Situations of banking distress have quickly intensified and in the process, have become one of the main obstacles to stability to the financial system. According to Lindgren et.al. (1996), 73 per cent of the member countries of the International Monetary Fund's (IMF) experienced at least one bout of significant banking sector problems from 1980 to 1996. More importantly, such crises have resulted in severe bank losses or public sector resolution costs. As Caprio and Klingebiel (1996) observe, such costs amounted to 10 per cent or more of GDP in at least a dozen developing country episodes during the past 15 years. Recent studies by Honohan (1996) provide the estimated resolution costs of banking crises in developing and transition economies since 1980 are pegged at US $ 250 billion reinforce this view."

But when the banking industry in the global sphere came out of this metamorphosis to re-adjust to the new order, they emerged revitalized and as more vibrant and robust units. Deregulation in developed capitalist countries particularly in Europe, witnessed a remarkable innovative growth in the banking industry, whether measured in terms of deposit growth, credit growth, growth intermediation instruments as well as in network.

During all these years the Indian Banking, whose environment was insulated from the global context and was denominated by State controls of directed credit delivery, regulated interest rates, and investment structure did not participate in this vibrant banking revolution. Suffering the dearth of innovative spirit and choking under undue regimentation, Indian banking was lacking objective and prudential systems of business leading from early stagnation to eventual degeneration and reduced or negative profitability. Continued political interference, the absence of competition and total lack of scientific decision-making, led to consequences just the opposite of what was happening in the western countries. Imperfect accounting standards and opaque balance sheets served as tools for hiding the shortcomings and failing to reveal the progressive deterioration and structural weakness of the country's banking institutions to public view. This enabled the nationalised banks to continue to flourish in a deceptive manifestation and false glitter, though stray symptoms of the brewing ailment were discernable here and there.

The government hastily introduced the first phase of reforms in the financial and banking sectors after the economic crisis of 1991. This was an effort to quickly resurrect the health of the banking system and bridge the gap between Indian and global banking development. Indian Banking, in particular PSBs suddenly woke up to the realities of the situation and to face the burden of the surfeit of their woes. Simultaneously major revolutionary transitions were taking place in other sectors of the economy on account the ongoing economic reforms intended towards freeing the Indian economy from government controls and linking it to market driven forces for a quick integration with the global economy. Import restrictions were gradually freed. Tariffs were brought down and quantitative controls were removed. The Indian market was opened for free competition to the global players. The new economic policy in turn revolutionalised the environment of the Indian industry and business and put them to similar problems of new mixture of opportunities and challenges. As a result we witness today a scenario of banking, trade and industry in India, all undergoing the convulsions of total reformation battling to kick off the decadence of the past and to gain a new strength and vigour for effective links with the global economy. Many are still languishing unable to get released from the old set-up, while a few progressive corporates are making a niche for themselves in the global context.

During this decade the reforms have covered almost every segment of the financial sector. In particular, it is the banking sector, which experienced major reforms. The reforms have taken the Indian banking sector far away from the days of nationalization. Increase in the number of banks due to the entry of new private and foreign banks; increase in the transparency of the banks' balance sheets through the introduction of prudential norms and norms of disclosure; increase in the role of the market forces due to the deregulated interest rates, together with rapid computerisation and application of the benefits of information technology to banking operations have all significantly affected the operational environment of the Indian banking sector.

As banking in the country was deregulated and international standards came to be accepted and applied, banks had to unlearn their traditional operational methods of directed credit, directed investments and fixed interest rates, all of which had led to deterioration in the quality of loan portfolios, inadequacy of capital and the erosion of profitability. Banks have now an entirely different environment under which to operate, to innovate and thrive in a highly competitive market and their success depended on their ability to act and adopt to market changes. These called for new strategies, different from those that related to regulated banking in a captive environment

In the background of these complex changes when the problem of NPA was belatedly recognised for the first time at its peak velocity during 1992-93, there was resultant chaos and confusion. As the problem in large magnitude erupted suddenly banks were unable to analyze and make a realistic or complete assessment of the surmounting situation. It was not realised that the root of the problem of NPA was centered elsewhere in multiple layers, as much outside the banking system, more particularly in the transient economy of the country, as within. Banking is not a compartmentalized and isolated sector delinked from the rest of the economy. As has happened elsewhere in the world, a distressed national economy shifts a part of its negative results to the banking industry. In short, banks are made ultimately to finance the losses incurred by constituent industries and businesses. The unpreparedness and structural weakness of our banking system to act to the emerging scenario and de-risk itself to the challenges thrown by the new order, trying to switch over to globalisation were only aggravating the crisis. Partial perceptions and hasty judgements led to a policy of ad-hoc-ism, which characterised the approach of the authorities during the last two-decades towards finding solutions to banking ailments and dismantling recovery impediments. Continuous concern was expressed. Repeated correctional efforts were executed, but positive results were evading. The problem was defying a solution.

But why? The threat of NPA was being surveyed and summarised by RBI and Government of India from a remote perception looking at a bird's-eye-view on the banking industry as a whole delinked from the rest of the economy. A bird's eye view is distinct, extensive and even sharp, but it is limited to the view appearing at the surface or top-layer. It is a not an exhaustive or in-depth view. Restricted merely as a top-layer view it is partial and is not even a top-to-bottom view, where a bottom-to-top-view alone can enlighten the correct contributing factors. Flying at a great height the bird can of-course survey a wide area, but it perceives only a telescopic view of the roof- top and not the contents that exist inside the several structures. A simple look at the whole provides summarised perception. But it is not a homogeneous whole that is being perceived. RBI looks at the banking industry's average on a macro basis, consolidating and tabulating the data submitted by different institutions. It has collected extensive statistics about NPA in different financial sectors like commercial banks, financial institutions, RRBs, urban cooperatives, NBFC etc. But still it is a distant view of one outside the system and not the felt view of a suffering participant. Individual banks inherit different cultures and they finance diverse sectors of the economy that do not possess identical attributes. There are distinct diversities as among the 29 public sector banks themselves, between different geographical regions and between different types of customers using bank credit. There are three weak nationalised banks that have been identified. But there are also correspondingly two better performing banks like Corporation and OBC. There are also banks that have successfully contained NPA and brought it to single digit like Syndicate (Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The scenario is not so simple to be generalised for the industry as a whole to prescribe a readymade package of a common solution for all banks and for all times.

Similarly NPA concerns of individual Banks summarised as a whole and expressed as an average for the entire bank cannot convey a dependable picture. It is being statistically stated that bank X or Y has 12% gross NPA. But if we look down further within that Bank there are a few pockets possessing bulk segments of NPA ranging 50% to 70% gross , which should consequently convey that there should also be several other segments with 3 to 5% or even NIL % NPA, averaging the bank's whole performance to 12%. Much criticism is made about the obligation of Nationalised Banks to extend priority sector advances. But banks have neither fared better in non-priority sector. The comparative performance under priority and non-priority is only a difference of degree and not that of kind.

The assessment of the mix-of contributing factors should have included

1. human factors (those pertaining to the bankers and the credit customers),

2. environmental imbalances in the economy on account of wholesale changes and also

3. inherited problems of Indian banking and industry.

While banks functioned for several decades under ethnic culture, Indian business and industry were owned, controlled or managed by single families, all having been nurtured and developed through innovative zeal of pioneers, represented by one dominant individual towering at each set-up. This inherently convey the sole-proprietorship culture and unable to quickly transform to modern professionally managed corporations of the global standard, where operations should be conducted on a decentralized knowledge-based work-group- an integrated teams of specialists each contributing to a core area of management. The Indian management set up everywhere turns mostly as one-man show even today.

Variable skill, efficiency and level integrity prevailing in different branches and in different banks accounts for the sweeping disparities between inter-bank and intra-bank performance. We may add that while the core or base-level NPA in the industry is due to common contributory causes, the inter-se variations are on account of the structural and operational disparities. The heavy concentrated prevalence of NPA is definitely due to human factors contributing to the same.

No bank appears to have conducted studies involving a cross-section of its operating field staff, including the audit and inspection functionaries for a candid and comprehensive introspection based on a survey of the variables of NPA burden under different categories of sectoral credit, different regions and in individual Branches categorized as with high, medium and low incidence of NPA. We do not hear the voice of the operating personnel in these banks candidly expressed and explaining their failures. Ex-bankers, i.e. the professional bankers who have retired from service, but possess a depth of inside knowledge do not out-pour candidly their views. After three decades of nationalised banking, we must have some hundreds of retired Bank executives in the country, who can boldly and independently, but objectively voice their views. Everyone is satisfied in blaming the others. Bank executives hold 'willful defaulters' responsible for all the plague. Industry and business blames the government policies.

An important fact-revealing information for each NPA account is the gap period between the date, when the advance was originally made and the date of its becoming NPA. If the gap is long, it is the case of a sunset industry. Things were all right earlier, but economic variance in trade cycles or market sentiments have created the NPA. Credit customers who are in NPA today, but for years were earlier rated as good performers and creditworthy clients ranging within the top 50 or 100. But what is the proportion of this content? Significant part of the NPA is on account of clout banking or willfully given bad loans. Infant mortality in credit is solely on account of human factors and absence of human integrity.

Credit to different sectors given by the PSBs in fact represents different products. Advance to weaker sections below Rs.25000/- represents the actual social banking. NPA in this sector forms 8 TO 10% of the gross amount. Advance to agriculture, SSI and big industries each calls for different strategies in terms of credit assessment, credit delivery, project implementation, and post advance supervision. NPA in different sector is not caused by the same resultant factors. Containing quantum of NPA is therefore to be programmed by a sector-wise strategy involving a role of the actively engaged participants who can tell where the boot pinches in each case. Business and industry has equal responsibility to accept accountability for containment of NPA. Many of the present defaulters were once trusted and valued customers of the banks. Why have they become unreliable now, or have they?

The credit portfolio of a nationalised bank also includes a number of low-risk and risk-free segments, which cannot create NPA. Small personal loans against banks' own deposits and other tangible and easily marketable securities pledged to the bank and held in its custody are of this category. Such small loans are universally given in almost all the branches and hence the aggregate constitutes a significant figure. Then there is food credit given to FCI for food procurement and similar credits given to major public Utilities and Public Sector Undertakings of the Central Government. It is only the residual fragments of Bank credit that are exposed to credit failures and reasons for NPA can be ascertained by scrutinising this segment.

Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all pervasive national scourge swaying the entire Indian economy. NPA is a sore throat of the Indian economy as a whole. The banks are only the ultimate victims, where life cycle of the virus is terminated.

Now, is not the Government an equal sufferer? What about the recurring loss of revenue by way of taxes, excise to the government on account of closure of several lakhs of erstwhile vibrant industrial units and inefficient usage of costly industrial infrastructure erected with considerable investment by the nation? As per statistics collected three years back there are over two and half million small industrial units representing over 90 percent of the total number of industrial units. A majority of the industrial work force finds employment here and the sector's contribution to industrial output is substantial and is estimated at over 35 percent while its share of exports is also valued to be around 40 percent. Out of the 2.5 million, about 10% of the small industries are reported to be sick involving a bank credit outstanding around Rs.5000 to 6000 Crore, at that period. It may be even more now. These closed units represent some thousands of displaced workers previously enjoying gainful employment. Each closed unit whether large, medium or small occupies costly developed industrial land. Several items of machinery form security for the NPA accounts should either be lying idle or junking out. In other words, large value of land, machinery and money are locked up in industrial sickness. These are the assets created that have turned unproductive and these represent the real physical NPA, which indirectly are reflected in the financial statements of nationalised banks, as the ultimate financiers of these assets. In the final analysis it represents instability in industry. NPA represents the owes of the credit recipients, in turn transferred and parked with the banks. What is the effect of the dismal situation on the psychology of entrepreneurs intending fresh entry to business and industry?

Recognizing NPA as a sore throat of the Indian economy, the field level participants should first address themselves to find the solution. Why not representatives of industries and commerce and that of the Indian Banks' Association come together and candidly analyze and find an everlasting solution heralding the real spirit of deregulation and decentalisation of management in banking sector, and accepting self-discipline and self-reliance? What are the deficiencies in credit delivery that leads to its misuse, abuse or loss? How to check misuse and abuse at source? How to deal with erring Corporates? In short, the functional staff of the Bank along with the representatives of business and industry have to accept a candid introspection and arrive at a code of discipline in any final solution. And preventive action to be successful should start from the credit-recipient level and then extend to the bankers. RBI and Government of India can positively facilitate the process by providing enabling measures. Do not try to set right industry and banks, but help industry and banks to set right themselves. The new tool of deregulated approach has to be accepted in solving NPA.