Create Conditions for Growth by Conducive Banking Norms

Union Minister Sri NitinGadkari made a very pertinent observation while addressing an event organised by an urban cooperative bank. He warned that taking action against every defaulting entrepreneur would freeze economic activities around the country and there would be hardly anybody who would be willing to take business risks. He said, “if we can’t protect and encourage such people, we can’t get people to take initiatives. If entrepreneurship is dead, where would capital investments come from? It will hurt the economy.” In June 2017, RBI set the ball rolling to cleanse the banking system of the NPA muck. It took to the Insolvency &BankruptcyCode 2016 route and asked its member banks to file cases against 12 of the largest corporate defaulters in the country. According to RBI, these 12 accounts owe Rs.2.5 lakh crore to the system, which constitutes around 25% of gross bad loans. Subsequently, another 28 of such big defaulters were identified which account for 40% of the dud debt pile up of Rs. 11 lakh crore!! On February 12, 2018 RBI published the revised framework for resolution of stressed assets. Under the new stricture, it has done away with common acronyms in banking circles viz. Corporate Debt Restructuring (CDR), Strategic Debt Restructuring Scheme (SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A) and the Joint Lenders’ Forum (JLF). This was in addition to the direction to the banks to file insolvency application under the Insolvency and Bankruptcy Code (IBC) 2016.

These twin measures already ruffled afew feathers inIndian corporates and the dozen benches of NCLT (NationalCompany Law Tribunal), the quasi-judicial authority formedunder the Companies’ Act 2013, around the country, witnessedcases being referred to it, day in day out.

Then came Valentine’s Day of 2018!

PNB broke the news of getting hit by the fraudulent transactions of approximatelyRs. 13500 crore. It not only exposed the deep rooted evils - one of which is surely the compromise made by the banks with borrowers’ risk profile, but also gave a cautionary nudge to RBI to the critical task in hand. The fallout was immense. At the close of Q4 2018 the 21 PSBs in totality lost more than Rs. 60,000 crore as the provisions for NPAs were to be factored into the financials as per RBI diktat. In fact, it took a toll on the capital adequacy numbers of several banks and in effect put a big question mark on the recapitalisation package ofRs. 2.11 lakh crore announced in November 2017, which are to take effect by end of FY 2019.

Financial Stability Report of June 2018, published by the apex bank also raised concerns about performance and risk of financial institutions (read PSBs).

1. The stress in the banking sector continues as gross nonperforming advances (GNPA) ratio rises further.

2. Profitability of PSBs declined, partly reflecting increased provisioning.

3. Macro-stress tests indicate that under the baseline scenario of current macroeconomic outlook, PSBs’ GNPA ratio may rise from 11.6% in March 2018 to 12.2% by March 2019.

While this has added pressure

4. Public sector banks under prompt corrective action framework (PCA) may experience a worsening of their GNPA ratio and capital shortfall relative to the required minimum CRAR of 9%.

on PSBs’ regulatory capital ratios, the provision coverage ratio has increased. 

5. Capital augmentation plan announced by the government will go a long way in addressing the potential capital shortfall.

6. Governance reforms - if undertaken promptly and well - would not only improve the financial performance of the banking sector but also help reduce operational risks.

While the banking sector needs to come out of the financial mess and work positively towards a cleaner and healthier balance sheet, structural policy changes for proper management of credit and operational risk is of paramount importance. The worsening trend of asset quality is present for several years. It is a Twin Balance Sheet Problem, as defined by the Economic Survey, which indicates the stressed situation for the bank and corporate at the same time. While the corporate are in financial trouble as the investment is not generating the top and bottom line because of difficult economic environment, the banks are getting hit for non-repayment of the debts by the corporate entities. Hence, as a whole, the Economy has been suffering for poor or near zero returns on the costly capital.

The market oriented mechanisms created by RBI along with other regulators and Government to tackle the issue of debt restructuring or asset reconstruction (viz SDR, CDR, S4A, JLF, ARC under SARFAESI Act) are found to be either grossly underperforming or a failure. In this backdrop, a more serious question emerges and that is, how to rehabilitate the stressed assets which clog the balance sheets of the PSBs in different qualitative and quantitative permutation and combination of NPAs, restructured loans and loan write-offs. The 2017 Economic Survey mooted the idea of creating the Public Sector Asset Rehabilitation Agency (PARA) to take over the stressed assets of the PSBs. The institution was proposed to be funded either by the government selling bonds, or by inviting private companies to participate in its equity. But then, this measure would create just another entity which would act as the garbage bin for PSBs to dump their NPAs and stressed assets and maintain the sanctity of a swatch balance sheet.

The creation of the asset reconstruction or asset Management Company for faster resolution of bad loans was revisited in June 2018 when the interim Finance Minister Piyush Goyal set up a committee under Chairmanship of Sri Sunil Mehta, the non-executive chairman of scam hit PNB. The Committee submitted its report recently and the same was accepted. It recommended a five pronged strategy to handle the bad loans of up toRs. 50 crore, between Rs.50 crore and Rs. 500 crore and beyond Rs. 500 crore. The strategies are classified as:

• SME resolution approach

• Bank-led resolution approach

• AMC/AIF led resolution approach

• NCLT/IBC approach and

• Asset-trading platform

The Committee had also set up a time line for such resolution:

Resolution of bad assets below Rs.50 crore within 90 days:

Banks would be required to create a ‘Focused Vertical’ for bad assets below Rs. 50 crore and set up a Steering Committee for resolution of such bad assets within 90 days.

Resolution of consortium loans between Rs. 50-500 crore within 180 days: It suggested the Bank Led Resolution Approach (BLRA) for loans between Rs. 50 and Rs. 500 crore and constitution of an Independent Screening Committee to examine resolution of such loans within 180 days and if there is no resolution in 180 days, then these bad assets would be moved to NCLT.

Resolution of loans above Rs. 500 crore: The loans above Rs. 500 crore would be dealt with via AMC/AIF-led resolution process. The panel proposed creation of a national Asset Management Company (AMC) to take over such NPAs from banks.

In case of consortium lending the Lead Bank, would beentrusted with the right to formulate the turnaround plan for the stressed asset, which be implemented on acceptance of at least 66% of consortium members. We have to wait and see the efficacy of the “Sashakt” plan, when it goes live in a month. IBC 2016, which is still on an evolving mode, has also given rise to certain pertinent questions which calls for clearer views. For example, in respect of bidding process whether the promoters of the company can bid has turned out to be a debatable issue. By an Ordinance of November 23, 2017 promoters of defaulting companies have been barred from the bidding process. But then what happens to the MSME pack of corporates, which hardly finds any bidders and their erstwhile promoters who want to win it back for restoration. Hence, a “willful defaulter” needs to be segregated and acted against. It is actually very important that the Committee of Creditors, who in most cases is the initiators of the Resolution process, should relearn that the objective of the statute is to resolve the situation and keep the company as a going concern and if all options fail then liquidate it and release the value to the economy.

The ailments of all the 700 odd companies on the surgery table of IBC are varied and therefore there is no panacea. And a correct dose of right remedy can actually give stress relief to the assets and recreate the likes of a Samtel Colour, a Ruchi Soya, a Kitply Industries or a Jenson & Nicholson who are languishing today. The Resolution process for the three companies in the iron & steel space –Essar Steel, Bhusan Steel and ElectroSteel – are looked at with huge optimism. For the turnaround of the steelsector globally would definitely create room for new demand and ready-to-produce infrastructure like this would fill in the gap and create value. It should be understood that the underlying premise to better deal with a NPA or stressed asset is an effective pre sanction appraisal by the financial institution and post sanction monitoring of the progress of the project for which the credit was obtained in the first place. Why wait for a disaster to take place and then, preoccupy the bank machinery to run the recovery process rather than expanding business. Let the process be more “preventive” than “curative” because a stitch in time would always save two!!!


— The author is the Chief Manager – Operations &Risk Management, Peerless Financial Services Ltd.

[The views expressed by the author in this article is his own.]

Saptarshi Roy Bardhan