The scenario of industrialization in the northeastern region is very grim. For a prosperous economy, prosperity of both industries and financial institutions is absolutely indispensable. In the NE region of the country, the industrial backwardness is hitting the financial institutions harder in comparison to most of the other parts of the country. That industrial backwardness is mainly characterized by financial paucity amongst most of the industrial units resulting in rising non-recovery of bank loans.
Banks invite deposits from the people. Except for current deposits, in respect of other deposits, the depositors enjoy interests on their principal amounts available with the financial institution. In respect of an amount ensuring undisturbed deposit both in terms of the amount and the minimum period for which the amount will be remaining deposited, the bank authority can very comfortably and certainly make use of that amount for lending purpose for a minimum period of time enabling it to earn more from greater rate of interest on such a lending by the bank compared to borrowing rates. Various fixed deposits form the basis of such sure and certain amount and period of lending by a bank.
While a bank has to pay interests on deposits under various deposit schemes, it must earn out of such deposits by lending. Out of that difference – positively towards earning from lending, a bank has to take care of its own expenditures and to boot, in order to thrive, it must also earn profit. But pathetically, in respect of almost all the public sector banks, the positions are altogether different. Any lacunae in mopping up the lent amounts together with the interests accrued on the lent amounts, from the borrowers may be fatal to the financial institutions. Now let us think of a situation when a bank has guaranteed the rate of interest on a fixed deposit in that bank but on the other hand the borrower from the bank has not repaid the amount receivable by the bank from him on the specified date. If a financial institution does not get back any of the amount, be it the interest or the principal amount or both out of its lending, within the stipulated period of time or on the date fixed for the purpose, that unrecovered amount is called Non-Performing Asset (NPA). It is crystal clear that the more is the non-performing asset, the more is the risk to that institution’s performance.
Increase in NPAs happens to almost all financial institutions with the only difference being in the volume of NPAs amongst them. NPAs are having manifold evil effects on a country’s economy also and most alarmingly that plethora of problems arising out of NPAs is all set to bludgeon the NE region’s economy resulting in much more bleeding if proactively meaningful actions are not taken towards that without any further lapse of time. In view of such a growing problem to the economy, requirement of acute professionalism in fund management in financial institutions has not only become a challenging job but it should also be taken up in right earnest forthwith. This is because the prevailing system is found to be fraught with more ad-hoc arrangements instead of concrete and result-yielding steps to arrest that trend on sustained basis. A serious outlook both in respect of contemplation of strategy and proper implementation of the same for the NE region is the need of the hour because the gap between the curves of total number of industries and the total number of loss-sustaining industries is tapering rapidly in this region.
Most of the industries in the region are plagued with the problems which are mainly due to improper management right from the point of planning as already dwelt on. On the one hand, those industries are suffering themselves and at the same time further industrialisation is hampered because not only that those industries are not having ploughed back profits but at the same time their financial instabilities are giving rise to acceleration of NPAs.
For a bank with increase in NPA, the major problem comes in the form of asset (credit) contraction which means the increased NPAs put pressure on recycling of funds and reduce the ability of banks for lending more and resulting in lesser interest income. It contracts the money stock which leads to economic slowdown because unless a bank has sufficient funds for lending, it cannot increase interest income and that together with peoples’ in-process negation of confidence in bank deposit and resultant staying away from deposit into bank, will jeopardize the bank’s survival. To attract people to deposit into the banks in such a precarious situation, the banks may have the only option to increase rate of interest on the deposits but that will give upward push to the rate of interest to the borrowing from the banks. In such a situation not only there is well-founded apprehension of further increase in NPAs but at the same time there will be increase in the turf for an increase in cost of production, with decrease in people’s purchasing capacity due to increasing inflation.
The most serious and tyrannizing factor for most of the industries in this region is improper management. This results in failure to repay loans and interests to the financial institutions offering loans thereby creating non-performing assets. Inept management in vast majority of the cases is the major reason of emergence of loss-sustaining industrial units with direct impact on enhancement of non- performing assets. Except for the petroleum and natural gas-based industries, compared to the total number of industrial units, how many profit-making manufacturing industries and service sector units are there in the NE region as a whole? Available statistics must be enough to show how much ascending that trend of bleeding units is.
Very often we find that more emphasis is given on statistical analysis of the trend of economic progress. To me, instead of being fussier about statistics, for the sake of alleviating the problem of non-performing assets, at this juncture, we should rather be more concerned with finding out the ways and means for balanced industrial development both in manufacturing and service sectors in this northeastern region since statistics do not give solution. This is possible only through all-encompassing industrial buoyancy. Otherwise, the honest taxpayers may also have to face the wrath of increase in taxes in the Government’s bid to generate money as one of the commonly considered readily available means to rectify the damage caused by NPAs to the region’s economy. But this will be in vain unless the problems are identified and rectified.
Satyajit Kumar Sharmah Thakur is an advocate of Gauhati High Court. He can be reached at email@example.com