The surge in non-performing assets [NPAs] of banks particularly during the last two years and steep increase in their losses due to higher provisioning requirements [during the last quarter of 2017-18, 25 banks have reported a loss of about Rs 50,000 crore] has been a big negative for the Modi – dispensation as it completes 4 years of its term.
True, it is a legacy problem from the previous UPA – dispensation when banks generously gave loans to favored persons [who enjoyed clout with the political establishment and bureaucrats] many a times without conducting due diligence and assessing viability of the projects and there was little or no follow-up on recovery. In fact, the banks went an extra mile giving them more loans to repay the previous ones [‘ever-greening’ as it is commonly known in jargon] under a number of so called ‘restructuring’ schemes.
Yet, in public perception, the blame sticks with the present government as NPAs are getting reflected in balance sheet of banks only now. It could have allowed – like the erstwhile UPA regime – these bad loans to be swept under the carpet, but it showed courage in recognizing them and face the problem head on. It has prepared itself to face the consequences and taken steps to minimize if not completely eliminate, the possibility of NPAs building up yet again.
It enacted the Insolvency and Bankruptcy Code [IBC] in December 2016. Superseding all existing laws on bankruptcy/winding up proceedings [being ‘piecemeal’ and lacking ‘bite’, these were used by defaulters to file cases in court in multiple jurisdictions with the sole intent of delaying action], this is a holistic legislation that forces the concerned authorities viz. lenders, judicial bodies, defaulter into prompt action and reach decision in specified time lines.
The government has also made necessary amendment in Banking Regulation Act [BRA] arming Reserve Bank of India [RBI] with requisite powers to give directions to banks for making reference to the National Company Law Tribunal [NCLT]. Earlier, even as the banks did not have requisite impulse of their own to make moves for seeking recovery of the loan amount, the RBI had only recommendatory/advisory powers.
The RBI has also dismantled all extant restructuring schemes such as corporate debt restructuring [CDR], strategic debt restructuring [SDR], 5/25, scheme for sustainable structuring of stressed assets [S4A] which were all meant to treat defaulters with kid gloves and provided no sustainable solution.
This way, the government is making a two-pronged assault on the NPAs. First, by creating a robust architecture and dedicated institutions, it has opened up the possibility of resolving these assets in a time bound manner. The mechanism of inviting bids for defaulting companies as a going concern and giving an opportunity to potential bidders to take control of the assets has meant that banks realize good value. This implies that they would take minimal haircut.
While, inviting the bids, some leeway is given to a defaulter/promoter who could not pay back because of factors beyond his control such as downturn in the business cycle. For instance, he/she is allowed to bid subject to his clearing the dues upfront. However, no such leniency is shown to ‘willful’ defaulter – who did not pay back despite having the capacity to do so or diverted the loan amount to a use other than the purpose for which it was given. Such defaulters are not eligible to bid even if they want to clear the dues upfront.
Second, the new dispensation under IBC puts pressure on the defaulting promoter – especially the ‘willful’ defaulter – to pay back due to the risk of losing ownership and management control when the lender triggers IBC proceedings.
The strategy is paying off. For instance, the resolution process initiated for Bhushan Steel Limited [BSL] which owed banks a staggering Rs 56,000 crore under the IBC has been successfully consummated. Tata Steel Limited [TSL] – the successful bidder – will pay Rs 35,000 crore for BSL implying that the banks would have recovered almost 2/3rd of the loan amount.
In another high profile case viz. Essar Steel Limited [ESL] which owes banks over Rs 50,000 crore, the resolution process under IBC is expected to be completed soon. Going by the bids received from two leading global players viz. ArcelorMittal and Numetal [Rs 38,000 crore and Rs 43,000 crore respectively], in this case too, over 2/3rd of the loan amount is expected to be recovered.
BSL and ESL are among a dozen cases referred by banks to the NCLT under directions from the banking regulator RBI in June, 2017. Their results juxtaposed with the unfolding bidding process for other cases point towards recovery of over 50% of Rs 200,000 crore being the value embedded in these NPAs.
An equally rewarding outcome is reports reg. 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.
While, this is for the past loans that turned bad, for the future the government has brought about a metaphorical change in the way loans are sanctioned. Thus, putting a stop to the cult of giving loans on patronage basis [read: connection with politicians/bureaucrats], it has directed PSBs to give loans after assessing the viability of projects and conducting due diligence. This together with strict norms for reporting default [including informing intelligence agencies], recognizing and initiating timely action for recovery will minimize the possibility of NPAs surging yet again.
All this may be fine as long as Modi remains at the helm. But, if there is change of guards, then the syndrome of politicians issuing diktats to PSBs and consequential resurrection of NPAs will come to haunt them again. This can be nipped in the bud if only he makes a bold move to divest majority stake in these banks.
As of now, Modi does not have it on his radar. Even if he were to take it forward, nothing is expected to happen until next general elections in 2019.