Increase in NPA's in Banks

[Seetharaman K C]

There has been virtually a relay race between the RBI and the Banks with the RBI announcing rate revisions continuously followed closely by increase in the Base and the PLR rates by Banks. No one seems to be bothered about the person paying this interest on Loans i e the Investor. Pure logic would dictate that he would have to increase prices, but does he really increase prices? Would the market accept it if he increases prices? It is really doubtful whether policy makers ever try to find answers to these questions or do they ever ponder on such issues before increasing interest rates?

It is really interesting reading when one goes back to the files and fishes out the papers where projections were submitted about the greenfield project to the bank where interest rates were kept constant with the positive assumption that invariably interest rates would come down with the excellent future performance parameters which were projected for the Indian Economy.Most of us would recall the excellent projections which were predicted for the Indian Economy most of which is still being maintained. However we all are aware that the NPA’s are on the rise and more accounts are expected to become NPA’s in the coming years.

The reasons are obvious, as a new unit which projected its cash flow with an interest burden of 11.5 % per annum would now end up paying interest @ 16.5 % per annum almost 50% increase in the interest burden. This increase for new units would come as a great blow as new projects with relatively new products or services would not be in a position to increase prices of their products to increase revenue as older players would be able to offer similar products at lower prices

The question which therefore arises is - What could be a possible solution where the unit also survives and the bank also gets its repayments on time without loans going bad?

The only workable solution could be to extend the time limit for repayment where the period of repayment is increased from present shorter periods to longer periods where the unit is capable of making disbursements regularly without any problems and the bank is also able to realize its loan amount and interest thereon over a longer period of time after considering the present value of future cash flows.

We have seen various schemes like CDR schemes etc where this sort of logic was followed , but most of this only benefited large corporate houses whereas the present hikes and future hikes to come would have an impact on all borrowers alike.

Let us hope that some better sense prevails and policy makers also strive to extend a helping hand to new investors so that they can meet their commitments in a dignified manner