Economy

Banking Ordinance a bold step but silent on considering environmental and social risk management to reduce NPA: CSE

The CSE calls for mandating environmental and social risk management for internal credit risk appraisal process

 
By Digvijay Singh Bisht
Last Updated: Wednesday 17 May 2017

There's an urgent  need 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

  1. Overall economic slowdown
  2. Delays in statutory and other approvals for projects under implementation
  3. Aggressive lending practices during upturn as evidenced from high corporate leverage
  4. Laxity in credit risk appraisal, loan monitoring in banks
  5. Lack of appraising skills for projects that need specialised skills, and
  6. Wilful default, loan frauds and corruption

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.

Developmental projects have often faced serious setbacks due to people’s protests

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.

Land-related conflicts have held up several development projects.

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

  • Procedural violation in public hearing,
  • Land conflict
  • Poor environmental assessment

Suspended

2.

East Coast Energy Thermal Power Plant, Kakarapalli, Andhra Pradesh

6,570  (which increased to Rs 9,443 )

Yes

(April 9, 2009)

4

  • Construction activities started prior to granting of  EC
  • Procedural violation
  •  Poor environmental assessment
  • Failure to address impacts on biodiversity, wetland and people’s livelihood

Under construction

3.

Nagarjuna Thermal Power Plant, Sompeta, Andhra Pradesh

12,000

Yes (December 9, 2009)

8

  • Impact on water body and biodiversity
  • Loss of livelihood,
  • Poor environmental assessment and procedural violation.

Scrapped

4.

Nirma Cement Plant, Gujarat

894

Yes (December 11, 2008)

7

  • Serious impacts on the water body and local groundwater hydrology
  • Gaps in environmental impact assessment

Under construction

5.

Coastal Andhra Power Limited Ultra Mega Power Project, Andhra Pradesh

17,400

Yes (October 23, 2007)

10

  • Land acquisition issues
  • Inadequate assessment of fuel linkages

Yet to begin construction

6.

Athena Damwe Hydroelectric Power Project, Arunachal Pradesh

13,145

Yes

(February 12, 2010)

5

  • Poor environmental assessment
  • Impact on livelihood  and biodiversity

Under construction

7.

Lavasa Hill City Project, Maharashtra

30,000 cr[1]

Yes

(November 9, 2011)

6 (Phase I)

  • Procedural violation
  • Land-related conflict
  • Impact on livelihood

Phase I yet to be completed

8.

Dhamra Port Project, Bhadrak, Odisha

3,200

Yes

(April 1, 2000)

8 (Phase I)

  • Impact on biodiversity, especially marine ecosystem,
  • Procedural violation,
  • Poor environmental assessment

Currently operational

9.

Vedanta Bauxite Mining Project, Odisha

4,000

Yes

(September 22, 2004)

10

  • Impact on endemic tribe (Dongria Kondh tribe) and biodiversity
  • Procedural violation
  • Poor environmental assessment

Scrapped

10.

Kalinganagar Steel Project, Odisha

10,000

Yes

(November 7, 2006)

8

  • Land acquisition and livelihood  issues

Currently operational

11.

Bhaironghati Hydro Power Project, Uttarakhand

296.82

No

2

  • Inadequate compensation
  • Biodiversity impacts
  • Inadequate public consultation,
  • Gaps in the EIA

Scrapped

12.

Jindal’s Tamnar Thermal Power Plant, Chhattisgarh

13,410 [2]

Yes

(March 18, 2011)

6

  • Impact on endemic tribe and biodiversity
  • Procedural violation in public hearing

Currently operational

13.

Loharinag Pala Hydro Project, Uttarakhand

2,895.1 [3]

Yes

(February 8, 2005)

NA

  • Impact on environment, especially on riverine ecosystem,
  • Cultural impacts

Scrapped in 2010

14.

Posco Steel Plant, Odisha

52, 810

Yes

(January 7, 2014)

7

  • Land acquisition and livelihood  issues
  • Procedural violation

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.

  1. Mandating E&S risk management for internal credit risk appraisal process
  2. Develop standard guidelines to be followed by all banks and financial institutions
  3. Capacity building of the banking staff
  4. Mandating transparency and accountability in project financing for both banks as well as the borrowers.

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