The CSE calls for mandating environmental and social risk management for internal credit risk appraisal process
The Banking Regulation (Amendment) Ordinance, 2017, which was passed by the Honourable President Pranab Mukherjee, confers more power on the banking regulators in order to address the Non-performing Asset (NPA) crisis that seems to have worsened with the banks' bad loans rising to Rs 9.64 lakh crore.“The stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution,” reads the opening line of the Ordinance passed on May 4, 2017.
In order to reduce the growing NPAs, the Reserve Bank of India (RBI), in the past, had taken several initiatives like issuing master circular, framework, guidelines and notifications. And lastly, after signing the ordinance, notification titled “Timelines for Stressed Assets Resolution” for NPA management was released by the RBI on May 5, 2017.
Under the Ordinance, additional power given to the RBI would allow it to,
Issue directions to any banking company/companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
Issue directions to banking companies for resolution of the stressed assets from time to time, and
Specify one or more authorities/committees to advise banking companies
The measures employed by the RBI and the Ordinance suggest that focus is more on “fire-fighting”— reactive rather than proactive approaches. Although the Ordinance is a commendable and bold step for addressing the present NPA crisis, it is silent on how future NPA crisis can be prevented.
In 2016, Raghuram Rajan, ex-Governor of RBI, while addressing the Public Accounts Committee, highlighted some of the main reasons for the growing NPAs within the banking sector. These include
This scenario, despite being grim, gives an excellent opportunity to the banking regulators to make suitable reforms that would prevent occurrence of such scenarios in the future.
Three of the six causes highlighted above—delays in statutory and other approvals for projects under implementation, laxity in credit risk appraisal and loan monitoring in banks and lack of appraising skills— highlight the current gaps in existing appraisal and monitoring process of the banks as well as their lack of internal capacity.
CSE analysis and other published documents in the public domain reveal that delay in obtaining project-related statutory and other approvals is mainly due to inadequate project planning, poor assessment, concealing critical issues and land-related conflicts originating from inadequate compensation, Resettlement and Rehabilitation (R&R) benefits and ownership rights settlement. Another main reason for delays in approval is violation of procedures as mandated under the statute.
One of the gaps in the existing project loan appraisal process is the lack of consideration given to environmental and social (E&S) risks prior to financing.
Although there is no absolute figure of NPAs due to E&S issues (like land, biodiversity, forest and environment), there has been a long list of developmental projects that have faced serious setbacks due to judicial intervention, non-compliance and people’s protest and conflicts. Looking at the major sectors which have the maximum number of stressed assets, we see that Iron and Steel, Power, Textile and other infrastructure projects have the major share.
Some of the examples summarised in the box below highlight that even after obtaining the required clearances and permits, how projects faced setbacks due to E&S issues.
PROJECTS AFFECTED DUE TO ENVIRONMENTAL & SOCIAL CONFLICTS |
||||||
S. NO |
Project |
Project Cost (in Rupee Crore) |
Environmental Clearance Granted & Date |
Delay in Years |
Reasons for delay |
Current Status |
1. |
Gare Palma Sub Block IV/6 Coal Mining Project, Raipur, Chhattisgarh |
479 |
Yes (May 18, 2009) |
6 |
|
Suspended |
2. |
East Coast Energy Thermal Power Plant, Kakarapalli, Andhra Pradesh |
6,570 (which increased to Rs 9,443 ) |
Yes (April 9, 2009) |
4 |
|
Under construction |
3. |
Nagarjuna Thermal Power Plant, Sompeta, Andhra Pradesh |
12,000 |
Yes (December 9, 2009) |
8 |
|
Scrapped |
4. |
Nirma Cement Plant, Gujarat |
894 |
Yes (December 11, 2008) |
7 |
|
Under construction |
5. |
Coastal Andhra Power Limited Ultra Mega Power Project, Andhra Pradesh |
17,400 |
Yes (October 23, 2007) |
10 |
|
Yet to begin construction |
6. |
Athena Damwe Hydroelectric Power Project, Arunachal Pradesh |
13,145 |
Yes (February 12, 2010) |
5 |
|
Under construction |
7. |
Lavasa Hill City Project, Maharashtra |
30,000 cr[1] |
Yes (November 9, 2011) |
6 (Phase I) |
|
Phase I yet to be completed |
8. |
Dhamra Port Project, Bhadrak, Odisha |
3,200 |
Yes (April 1, 2000) |
8 (Phase I) |
|
Currently operational |
9. |
Vedanta Bauxite Mining Project, Odisha |
4,000 |
Yes (September 22, 2004) |
10 |
|
Scrapped |
10. |
Kalinganagar Steel Project, Odisha |
10,000 |
Yes (November 7, 2006) |
8 |
|
Currently operational |
11. |
Bhaironghati Hydro Power Project, Uttarakhand |
296.82 |
No |
2 |
|
Scrapped |
12. |
Jindal’s Tamnar Thermal Power Plant, Chhattisgarh |
13,410 [2] |
Yes (March 18, 2011) |
6 |
|
Currently operational |
13. |
Loharinag Pala Hydro Project, Uttarakhand |
2,895.1 [3] |
Yes (February 8, 2005) |
NA |
|
Scrapped in 2010 |
14. |
Posco Steel Plant, Odisha |
52, 810 |
Yes (January 7, 2014) |
7 |
|
Scrapped |
CSE recommendations to minimise bad loan scenario due to Environmental & Social issues
From the above examples, the importance of E&S risk management as part of the credit risk appraisal process can’t be undermined. With the current bad loan scenario reaching an all-time high, the Centre for Science and Environment would like to recommend some measures to the RBI and banking regulators to minimise the reoccurrence of such scenario in the future.
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