The Superficial NPA Arguments

Subiksha Anand · Jun 21, 2025

amit2011 said:
The superficial NPA arguments

By: Amit Bhushan Date: 3rd April 20161

BANKING NPA DEBATEST here is again a chance to belittle the problems pertaining to NPAs especially at the PSU banks. Arguments being forwarded mostly goes like this. That risk taking is part and parcel of any business. Entrepreneurs take risk to make wealth and banks and investors too, participate in risk taking of sorts in order to make their money. Some amount of losses is therefore justified. As we are encouraging more entrepreneur and by the same logic - risk taking; so NPAs should not be of much concern. Even new entrepreneurs would make some NPAs which will come forth later. And actually there is nothing wrong in the above statement/s since these are matter of fact.

However, it is the way how the overall lending system works and the impact on the ecosystem which makes things either justified or unjustified. If two entrepreneurs propose same or similar projects, and one of them has past or family background of business (with banking relationships) while other hasn't; one can easily know who would walk away with the bank finance. The decision has got nothing to do with ability to either develop/nurture the new project or ability to operate the project successfully. Just ability to 'deal' with the bank is the primary key to decision. It may be noted that past background of the loan to the entrepreneur or his family regards repayment, may not be called for in many such occasion and just 'knowing' people does the job sometimes with a little "greasing of palms". And, the bankers feel perfectly "right", (even ignoring the bribery involved as minuscule role) since there is possibility of advice and support from family for the project as well as in "managing" banking and other relationships with the requisite authorities towards successful running of such projects.

So banker believe that managing these relations with authorities and financers is a key to successfully service the loan rather than project skills. It is in this context that discussions related NPAs become vital. By clearly forcing NPAs related rules, one is avoiding concentration risk of loans and allowing more entrepreneurs in the economy. Firstly, by ensuring that bias in the banking system is evened out a bit and bankers are not able to play favorites (since there is also a demand to monitor suitable credit deposit ratios in banks, although conveniently ignored by media eager to push their own stories). Second, by ensuring that businesses who have defaulted on loans are concentrating to correct the track record first, so better distribution of opportunities. This is not the case presently as most (Big) defaulters are seen clamoring for fresh projects with the backing of political lordship as well as bankers.

Third is improving better planning process since entrepreneurs who face the risk are in a better position to foresee these early on and advise the government to iron out the issues beforehand; which in present scenarios is not done where focus is on getting the project awarded and then managing 'things' later. This also allows entrepreneurs to stick to their competency areas rather than spreading themselves left, right and center since a flop show would have repercussions not only on the new project but also ensure enough pressure on the existing ones to make good towards the losses of the lenders as is the case for the not so well connected businessmen. Sorting out these issues actually improves the system and helps new as well as old business to proper basis their own competitive merits.Now coming to the issue that such measures would lower credit off take and hence growth which being touted as some great anti-people measure and probably one that would lead to more NPA related pressures on banks.

If stressed assets are restructured through the strategic investors route (which is normally seen as creating best value as well as possible better valuation), then banking assets become stress free and therefore lesser pressure on banks. They also become better aware of issues in the sectors that they have financed as such exercise would bring out such issues as well as ways to resolve them. This actually improves competency to lead as well as to deal with issues, subject of course to the political will. However what we have is tendency of intellectuals is to back the existing businessmen and political leadership view that investments and credit would come to a halt should banks become aggressive with the defaulting businesses. This has two assumptions not getting questioned i.e. first, the government may not be smoothing out issues with the industry to the extent desired by (strategic) investors and second is a dearth of new risk takers especially for large projects. This is even as well have numerous small and medium enterprises wanting to become bigger and also a flourishing start up sector as reported.

Now what may be lacking is guanxi connect (and we thought that guanxi is only Chinese problem) with these businesses, but the banks and commercial news media simply makes this issue non-existent, isn't it. And then we also have policy based decisions as well, isn't it.

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Amit Bhushan’s article on the “superficial” nature of current NPA (Non-Performing Assets) debates in India’s banking system is a sharp and necessary departure from the sanitized narratives often peddled by mainstream financial media. It cuts through the glossy jargon and exposes the uncomfortable, unspoken truth: that systemic favoritism, political patronage, and a culture of misplaced banking incentives—not risk-taking alone—are at the heart of the NPA epidemic, especially in the public sector banking (PSB) space.

Let’s first dispense with the hollow argument that NPAs are simply the byproduct of economic ambition—that losses are the cost of fostering entrepreneurship. While it’s true that risk is inherent in any lending ecosystem, Bhushan is correct to point out that the problem is not the presence of risk but the uneven distribution of that risk and the arbitrary selection of who gets funded. What he terms as “knowing the banker” or having a “business background” as qualifiers for receiving massive loans, often outweighs a project's actual viability or an entrepreneur’s operational acumen.

Herein lies a deeply rooted rot: banks aren't just misjudging risk—they're rewarding proximity. This form of embedded cronyism leads to a distortion where well-connected but underperforming business houses get bailed out or refinanced while first-generation entrepreneurs with sound ideas but limited political or familial capital are denied access. Such opacity not only fuels NPAs but also systematically prevents the democratization of credit.

Bhushan raises a crucial point about credit-deposit ratios and the media’s silence on it. The press rarely challenges the discretionary practices of lending—likely because such challenges might implicate large corporates, influential bankers, or policymakers. It's easier to recite a tired script blaming "bad economy" or "global slowdown" for bad loans than to question why a handful of repeat defaulters keep receiving credit lifelines while India’s aspiring small and medium businesses remain stranded.

Moreover, his observation that project planning is an afterthought—with bankers and entrepreneurs more interested in landing deals and managing bureaucratic relationships—is an important critique of India’s project implementation culture. Many projects are initiated with political fanfare but falter under poor execution, and when they do, the cost is socialized. The lender takes the hit, the taxpayer bears the brunt, and the promoters—usually insulated by political connections—are rarely held accountable.

Bhushan’s call to bring transparency and accountability to NPA restructuring processes through the strategic investor route is pragmatic. Instead of brushing bad loans under the carpet with "evergreening" techniques, restructuring them via credible investors (with proper due diligence and disclosures) can both recover value and inject private discipline into the system. However, as he rightly notes, such reforms require political will, which is often missing when the defaulter is a political benefactor.

His closing remarks about India’s flourishing start-up ecosystem and aspiring SMEs is perhaps the most under-discussed opportunity in this debate. There is no dearth of entrepreneurial energy in India. What there is, however, is a chronic misallocation of credit—from innovation and value creation to entrenched monopolies and capital hoarders. The system continues to favor the familiar over the feasible.

The final thrust of Bhushan’s argument—that India too suffers from its version of the Chinese guanxi (relationship-based networking)—is devastating in its accuracy. It forces us to ask: is our problem really that businesses fail, or is it that we don’t allow new ones to succeed because they lack the right "connections"?

In sum, Bhushan’s article is not just a critique of NPAs but a mirror to the larger dysfunction within India’s banking ethos. It challenges readers—especially policymakers, regulators, and banking professionals—to look beyond numbers and focus on the entrenched behaviors and biases that breed financial instability. Until we confront those truths, all talk of banking reform will remain as superficial as the debates he rightly dismantles.

Dhruv Bindhani · Jun 24, 2025

The provided text, "The superficial NPA arguments," by Amit Bhushan, dated April 3, 2016, offers a critical commentary on the prevailing arguments surrounding Non-Performing Assets (NPAs), particularly in Public Sector Undertaking (PSU) banks in India. The author challenges the simplistic view that NPAs are merely an inevitable consequence of risk-taking in business.

Challenging Superficial Arguments

Bhushan first outlines the common, seemingly innocuous arguments: that risk is inherent in business, entrepreneurs take risks, and banks participate in them, so some losses (NPAs) are justified, especially with a push for more entrepreneurs. While acknowledging the factual basis of these statements, he argues that the overall lending system and its impact on the ecosystem determine whether these losses are truly justified.

Bias in Lending Practices

The core of Bhushan's critique lies in the bias prevalent in the Indian banking system. He posits that bank finance often favors entrepreneurs with existing "business (with banking relationships)" or family backgrounds in business, over new entrepreneurs, regardless of project viability or operational ability. The decision, he argues, hinges more on the "ability to 'deal' with the bank," sometimes facilitated by "greasing of palms," rather than project merit. Bankers, he claims, rationalize this by believing that "managing relations with authorities and financers is a key to successfully service the loan rather than project skills."

The Importance of Enforcing NPA Rules

It is within this context that Bhushan asserts the vital importance of strictly enforcing NPA-related rules. He outlines three key benefits of such enforcement:

Reducing Concentration Risk and Bias: By strictly adhering to NPA rules, banks are prevented from "playing favorites," thereby evening out biases in the lending system and avoiding concentration of loans. This would also encourage monitoring of suitable credit-deposit ratios, often ignored by the media.
Promoting Fair Opportunity Distribution: Enforcing rules would compel businesses that have defaulted to first rectify their track records, leading to a better distribution of opportunities. Presently, many large defaulters, often backed by "political lordship as well as bankers," are seen clamoring for fresh projects.
Improving Planning Processes and Competency: Entrepreneurs would be incentivized to foresee issues earlier and advise the government proactively, rather than focusing solely on securing project awards and managing "things" later. This also encourages entrepreneurs to stick to their areas of competency, as a "flop show" would have repercussions, unlike the situation for "well-connected businessmen." This systemic improvement would allow businesses to prosper based on their "competitive merits."

Addressing Concerns about Credit Offtake and Growth

Bhushan also tackles the argument that strict NPA measures would lower credit off-take and hinder economic growth. He counters this by suggesting that if stressed assets are restructured through strategic investors, it can free up banking assets and provide banks with better insights into sector-specific issues. He criticizes the intellectual and political tendency to protect existing defaulting businesses, based on two questionable assumptions: that the government is adequately addressing industry issues for investors, and that there's a "dearth of new risk takers" for large projects. He points to the numerous aspiring small and medium enterprises and a flourishing startup sector as counter-evidence, implying that what's truly lacking is "guanxi connect" (connections) for these newer businesses. He sarcastically questions why this crucial "guanxi connect" is ignored by banks and commercial news media, implying a deeper, unspoken issue tied to policy decisions.

Conclusion

In summary, Amit Bhushan's piece is a sharp critique of the systemic flaws contributing to India's NPA problem, arguing that it's not merely about inherent business risk but about biased lending practices and a lack of accountability. He strongly advocates for strict enforcement of NPA rules as a mechanism to foster a fairer, more merit-based, and ultimately healthier lending ecosystem.

Rick Sanchez · 2025-07-03T22:27:46+0530

Interesting!

The Superficial NPA Arguments