The issue of non-performing assets (NPAs) in Indian banks is going to worsen in the next few years, according to 72% of bankers surveyed by consulting firm EY.
The EY survey asked respondents about various issues relating to rising bad loans, including the reasons and ways to contain the problem.
In a report titled Unmasking India’s NPA Issue released on Tuesday, EY stated that 72% of respondents, a majority of whom were bankers, felt that in the current scenario, the Reserve Bank of India (RBI)’s debt restructuring norms are being misused by borrowers.
According to the report, the overall level of stressed loans—or the sum of gross NPAs and gross restructured assets—went to over 11% in March 2015, from 9.2% in March 2013. Similarly, gross NPAs rose to 4.6% from 3.4% in the same period.
At 39 listed banks, gross NPAs rose 27.69% to Rs.3.21 trillion on 30 June 2015 fromRs.2.51 trillion a year earlier.
The report noted that about 40% of loan accounts restructured between 2011 and 2014 had turned bad.
“The pace and quantum with which restructuring of loans were being undertaken, implied that restructuring of accounts was being resorted to avoid classification of accounts as NPA and thereby enable lower provisioning in the bank books,” the report said.
As many as 87% of respondents said the diversion of bank funds to unrelated businesses or fraud by borrowers directly resulted in the steep rise in the level of bad loans. Also, 64% of respondents believed lapses in the initial due diligence was a big reason for increased NPAs, said the report.
Only 15% of respondents were optimistic that recent regulatory changes by RBI and increased supervision would be productive in controlling rising NPAs.
Most respondents said forensic audits of accounts instead of the present practice of carrying out a general audit of accounts of the borrowers before taking a call on the debt restructuring will help.
About 91% of bankers who responded to EY’s queries agreed that forensic audits prior to approval of restructuring plans was essential to control incidences of default. Further, 54% of respondents believed a forensic audit would help weed out wilful defaulters from genuine borrowers.
The survey noted that 68% of respondents felt that enhancing their internal skill sets on credit assessment and evaluation was essential in fighting the NPA issue, while 56% said that independent borrower checks were essential in ensuring that the situation does not worsen.
EY said that the survey recorded responses from 110 participants, largely from public sector, private sector, foreign and co-operative banks. Most bankers surveyed worked with credit operations in their respective banks. Other bankers were from the legal and compliance, loan recovery, auditing and vigilance departments.
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