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Strict NPA norms will hit small units

Basel guidelines are only meant as broad standards

THINK GLOBALLY, act locally, it has been said.

Jean Tardif of Planetagora, an umbrella group that promotes public debate on international public policy, in his article "The Hidden Dimensions of Globalisation: What is at Stake Geo-culturally?" says that a set of ideas that had long been accepted as appropriate within the Organisation for Economic Cooperation and Development (OECD) countries was sweeping aside policies of the 1950's in Latin America. Arguably one of the most discussed terms known as the Washington Consensus was thus espoused by him broadly outlining fiscal discipline, reordering public expenditure priorities, tax reform, liberalising interest rates, a competitive exchange rate, and trade, liberalisation of inward foreign direct investment, privatisation, and deregulation of property rights as issues aimed specifically at Latin America.

He has emphasised that this was done at a particular moment of history and not as a text for all countries at all times and rued that he would have added the need for policies designed to crisis-proof economies and stabilise them against the business cycle, had he known that his consensus would be regarded as a comprehensive blueprint for policy practitioners to be blindly followed as a text for all countries at all times. Thus macro economic policies should be formulated along broad contours but micro economic policies should involve an active role for the state as the Korean, Taiwanese and Chinese experience shows.

These facts are highlighted here for the simple reason that what arose out of the Washington Consensus as structural reforms, particularly financial sector reforms, came to be carried under the aegis of the Bank of International Settlements (BIS) by The Basel Committee on Banking Supervision (BCBS).

Basel Capital Accord

In 1988, the committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accord. This system provided for the implementation of a credit risk measurement framework with a minimum capital standard of eight per cent by end-1992. Since 1988, this framework has been progressively introduced not only in member countries but also in virtually all other countries with active international banks.

This has been done in spite of the fact that the committee admits that it does not have any formal supranational supervisory authority, and its conclusions do not, and were never intended to, have legal force. Rather, it formulates broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements — statutory or otherwise — which are best suited to their own national systems. In this way, the committee encourages convergence towards common approaches and common standards without attempting detailed harmonisation of member countries' supervisory techniques.

But what has happened in the Indian context is that these norms have been introduced more vehemently and across the board, though our banks are not active international banks in the strictest sense both in terms of size and volume of business. It is a well-known fact that the capital adequacy norms of the Basel Committee were evolved to protect banks from financial crises so common in the Eighties in the developed world as such.

These norms have been applied as a one-size-fits-all model without reference to the ground realities of our own strengths and weaknesses.

That the complex structure of administered interest rates in India guided by social concerns resulted in cross-subsidisation distorting the interest rate mechanism and adversely affecting the viability of banks was an overhang problem more to do with the bad quality of appraisal and lending by the banks. But this factor has been conveniently obfuscated. That this came about over a long period of time, more importantly due to ownership and regulatory overlap of the governments of the day, were other important factors which have been brushed under the carpet.

The pressure of directed lending, not necessarily confined to the priority sector, and lending to large industry and the PSUs under the development finance mode, are all socio economic issues which have impacted the banks.

Therefore, one of the Basel international codes and standards, the 90-day overdue norm for a loan account to be treated as non-performing asset (NPA), should be relaxed for small and tiny enterprises, in view of the fact that payments to SSI suppliers are delayed beyond 180 days as a rule, sometimes even to 210 to 270 days, notwithstanding the Delayed Payment Act.

The 90-day norm for a loan account to be treated as NPA is counter-productive, because, if a particular bill is not honoured on the 90th day, not only the drawing power of the borrower gets reduced, but it also sets off a chain reaction, as a result of which the account itself slips into the status of an NPA.

The mere fact that there has been a marked improvement in the asset quality with the percentage of gross non-performing assets (NPAs) to gross advances for the banking system getting reduced from 14.4 per cent in 1998 to 7.2 per cent in 2004, is only one part of the story. The perceived notion of a drop in the NPAs of public sector banks (PSBs) after the implementation of the Basel I norm actually conceals more than it reveals. This can be seen in the context of the drastic drop in terms of financing of the SSI and tiny sectors both as a percentage of credit and also lower growth in real terms taking inflation into account.

With their appetite for risk-free government paper far in excess of statutory requirements and thus making huge profits in treasury operations till recently, the PSBs have reaped a double whammy of carrying on narrow banking and at the same time making profits. This of course has helped a majority of them to liberally provision their NPAs, if not anything else.

A casualty has been finance for the SSI and the tiny sectors, which have taken a fatal hit. This has driven a majority of them to sickness, incipient and in various other stages, and many of them to mortality. Moreover the high cost of funds, which even this reduced financing has entailed, has robbed them of what little incentive was left for them to upgrade technologically and to modernise. So Basel I or Basel II, the priority of the UPA Government should be to see that the SSIs and the tiny sector are not starved of funds.

DE. RAMAKRISHNAN

The author is President, National Confederation of Small Industry

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