People’s Bank clarifies on non-performing assets portfolio

It is a deception to state that, “The People’s Bank’s NPA portfolio compares well with industry averages”

While appreciating the banks decision to respond to the discussions going on in several public forums regarding the NPA portfolio of the PB, following views are expressed to elucidate the public concerns and to throw more light on certain relevant aspects of the matter.

Certain facts as given in the statement of the Bank appear to be covering half the ground of the issue if not misleading and tantamount to a confession of some sort. Hence further interpretation is necessary in the public interest to elicit more information to arrive at the truth.

It is true that a mere classification of a facility as a NPA does not constitute a write off. But it is incorrect to state that the process of recovery commences only after the transferring of a facility to NPA category. Proper loan recovery procedures include constant vigilance and follow up action from the time the repayment commences.

In fact, before a loan or any other facility is considered as NPL, there are several steps to be taken in order to comply with the provisions of the directions issued to Commercial banks by the CBSL, under the banking Act No.3 of 2008. The CBSL guidelines and directions clearly state how a loan, or another facility could be treated as a NPL.

NPL shall mean bad and doubtful debts as referred to in section 46A of the Banking Act. Any credit facility shall be classified as non-performing based on several factors.

Based on period of default and this varies with overdrafts, credit facilities repayable in monthly or other fixed instalments when the terms applicable are defaulted.

Based on potential risk where full recoverability in accordance with the agreed terms is in doubt due to circumstances affecting the repayment capacity.

According to Sri Lanka Accounting Practice (LKA 39) even if a borrower repays a loan regularly, if his financial position according to published accounts reflects a decline, banks are expected to treat facilities given to such a customer as non-performing due to possible potential risks. We have seen several facilities granted in this category as exposed at the recent COPE investigations into the performance of the People’s Bank.

Loans categorised into NPL are required to be further classified into four different groups based on,

a) the period which the credit facilities have remained non-performing and

b) the potential risk of credit facilities.

They are,

“Special Mention” credit facilities, sub-standard credit facilities, doubtful credit facilities and Loss Credit facilities.

Therefore, a statement which merely indicates that various actions are initiated after categorising into NPL and that they are not written off, is an incomplete and misleading one. It is possible among these transferred into NPL there are facilities which are non-recoverable. In fact, we are aware that successful litigation is not possible in certain cases due to serious lapses on the part of the lending authorities such as incomplete or wrongful securitisations followed while lending. These things rarely get exposed because some officials will become answerable. Such loans too will continue among other NPLs.

There are facilities granted in millions of foreign currency equivalents (USDs) in the category of NPL where the borrowers are not traceable. Hence the banks claim that write off is undertaken only if and after every other avenue for recovery is fully exhausted is highly untenable.

It has to be pointed out that the People’s Bank’s portfolio of NPLs does not reflect the true position of the risk element in terms of ratios compared with other Commercial banks. This has to be understood in real banking terms. The NPL ratio is arrived at by taking it in the numerator as a fraction of total lending portfolio in the denominator. It has to be understood that the total lending portfolio of the PB comprises a large percentage of non-commercial (private) lending because the majority component is to the State Sector and a significant percentage as pawning advances and other government guaranteed loans under special schemes. The lending into the Commercial and private sector is therefore a small percentage which is about 40% of the total. What has gone into NPL are loans from this small percentage. If the NPL calculation is taken as a ratio of the private (Commercial) lending total, then the NPL ratio of the Peoples’ Bank would be the highest in the banking industry in this country. Therefore, it is a deception to state that, “The People’s Bank’s NPA portfolio compares well with industry averages”

The other statement in this clarification to the effect that, “the Bank’s portfolio of NPAs consist of those originating/having been so classified during a period over two decades” is another red herring to indicate that the bank is performing fine except for long past mistakes. While we do not wish to pass any comments or criticism, we wish to point out that the doubts entertained by the public will be and can be eliminated only by showing the amounts transferred into NPL, on a period wise basis as a percentage of the total commercial lending portfolio (because the bank is well entitled to take cover under the oath of secrecy and customer privacy).

These days the Public expect the Government as well as Government owned institutions to be as transparent as possible and to divulge the Truth and nothing but the Truth.