A legacy problem that continues to haunt Modi – government is high non-performing assets [NPAs] of public sector banks [PSBs]. Swept under the carpet for several years by the erstwhile UPA regime, it has acted with alacrity in recognizing the NPAs and created a robust architecture for resolving them in a time bound manner.
It enacted the Insolvency and Bankruptcy Code [IBC] [December 2016]. Superseding all existing laws on bankruptcy [those were ‘piecemeal’ and lacked ‘bite’], this is a holistic legislation that forces the banks and judicial bodies into prompt action. It has made amendment in Banking Regulation Act [BRA] arming the Reserve Bank of India [RBI] with requisite powers to give directions to banks for making reference to the National Company Law Tribunal [NCLT]. The proceedings under NCLT must be consummated within 180 days with an extension of 90 days in exceptional cases.
Following this, the apex bank sent two lists of major defaulters to banks [June & December, 2017] for taking up resolution and in case not resolved [within deadline] make reference to NCLT.
Meanwhile, on February 12, 2018, RBI went a step further requiring banks to initiate resolution of stressed assets – the so called special mention account [SMA-2] wherein either the loan or interest is in default for 60-90 days [as against standard practice wherein borrower is in default for more than 90 days].
As soon as there is a default in the borrower’s account with any lender, all lenders – singly or jointly – shall initiate steps to cure the default. The resolution plan [RP] may involve any actions/reorganization including, but not limited to, regularization of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities/investors, change in ownership, or restructuring.
In respect of accounts with aggregate exposure of the lenders at Rs 2,000 crore and above, on or after March 1, 2018 [reference date], RP should be implemented within 180 days. If, in default after the reference date, then 180 days from the date of first such default.
All lenders are required to submit report to Central Repository of Information on Large Credits [CRILC] on a monthly basis effective April 1, 2018. In addition, the lenders shall report to CRILC, all borrower entities in default [with aggregate exposure of Rs 5 crore and above] on a weekly basis.
The RBI abolished all existing mechanisms including extant schemes viz. 5/25/SDR/CDR/S4A. It has also abolished the Joint Lenders’ Forum [JLF] – an institutional mechanism to coordinate actions on cases under consortium lending. All accounts, including those where any of the schemes have been invoked but not yet implemented, shall be governed by the revised framework.
The above is a perfect architecture that helps in resolving these assets in a time bound manner. The emphasis on inviting bids for defaulting company as a going concern ensures realization of a good value by the bank. The strategy is paying off.
For instance, the resolution for Bhushan Steel Limited [BSL] which owed banks a staggering Rs 56,000 crore under IBC has yielded Rs 35,000 crore paid by Tata Steel Limited [TSL] or 2/3rd of the loan amount. Likewise, in case of Essar Steel Limited [ESL] which owes banks over Rs 50,000 crore, the recovery is expected to be about Rs 40,000 crore or 80%.
An equally rewarding outcome is 2100 companies having repaid loans amounting to over Rs 80,000 crore to the banks. This is due to the fear that in the event of the case being referred to IBC, the promoter will lose control. This change in the mindset holds huge potential for return of mammoth sums in the times ahead.
Meanwhile, a committee under Sunil Mehta, chairman, Punjab National Bank [PNB] has come up with a plan dubbed ‘Project Sashakt’ that involves inter alia setting up of an alternate investment fund [AIF]/asset management company [AMC] for faster and transparent resolution of loans. PSBs will take the lead in setting up the AMC for loans above Rs 500 crore. The AIF/AMC will raise funds from domestic investors and sovereign wealth funds [SWFs].
The banks will consolidate loans taken from different lenders and through inter-creditor agreement, authorize the lead bank to invite bids through open auction. The proposed AMC can also bid for these loans along with others such as asset reconstruction companies [ARCs]. The AMC would allow promoters to retain less than 24% in the assets which it takes over for resolution.
Why despite a potent arrangement [IBC] already working well, the government is keen to put in place yet another which will lead to avoidable duplication. Besides, there are inherent flaws in the proposed mechanism. It expects banks riddled with stressed assets to also assume the role of a bidder masquerading as AMC/AIF. How can an entity itself in financial trouble double up as a rescuer?
Already, under subsisting arrangement, ARCs [over 25 of them are in the fray] are involved in bidding for stressed assets. Where is the need for setting up more of such entities – call it AMC or any other name? If, they are not adequately capitalized, they can always raised funds from investors/SWFs etc. There is no valid justification for setting up more of such entities and banks to get involved.
The proposal seeks to resurrect the idea of a ‘bad bank’ under a new garb. This will entail transfer of NPAs from banks books at huge discount to AMC. Further, letting promoter of defaulting company retain a share even after AMC takes full control smacks of enabling him to slip in to the drivers’ seat after the asset is repaired. Moreover, by preventing cases from landing up with IBC [when, resolution happens within bank, there won’t be any need for invoking IBC], this will render the Code dysfunctional.
The so called ‘Project Sashakt’ connotes empowerment. Far from that, its implementation would only weaken the banks. The government should reject it outright; instead, it needs to work on increasing the effectiveness of the processes under IBC for maximizing realization from sale of the stressed assets.