In a brief prepared for the G-20 meeting at Hamburg, the International Monetary Fund [IMF] turned the spotlight on vulnerabilities of the Indian banking sector caused primarily by unsustainable level of non-performing assets [NPAs]. As on December 31, 2016, gross NPAs were about Rs 676,000 crores – 90% of these with public sector banks [PSBs]. The figure will be close to Rs 1000,000 crores if one includes the bad loans given a lease of life via ‘restructuring’ – a euphemism for relaxing payment terms.
The problem had been festering for quite some time under United Progressive Alliance [UPA] and assumed monstrous proportions during its second term [2009-2014]. This remained camouflaged until such time the Reserve Bank of India [RBI] initiated asset quality review [ARQ] which resulted in bringing stressed assets to the centre-stage and making them transparent.
Modi – government made a determined bid to address the problem by promulgating an ordinance on May 3, 2017 to amend Banking Regulation Act [BRA] giving RBI powers to order action against loan defaulters under Bankruptcy Code which lays down precise timelines for winding up of companies and debt recovery. Under the Code, bank need not even have to wait for 90 days of default – otherwise required for a loan to be termed as NPA – and entire process has to be completed in 180 days.
The amendments also enable RBI to set up multiple oversight committees and give them more powers to deal with NPAs. They will monitor progress of top 35-40 NPAs in value terms [these constitute 60 per cent of all NPAs]. They get enhanced mandate to help lenders with their decision-making, including by Joint Lenders Forum [JLF]. They will decide on matters such as which bank will take how much ‘haircut’ and to intervene if JLF reaches a deadlock.
The guidelines concerning JLFs have also been tweaked whereby once a simple majority of the banks in the consortium, based on their exposure to the bad loan, takes a decision [at present, these need to be approved by 75 per cent in terms of exposure or 60 per cent in terms of absolute numbers] it will be binding on other banks who are part of the group. This will help remove the current logjam and speed up decision making process in the JLF.
The government has also mooted amendment to the Prevention of Corruption Act [PCA] to ensure that commercially viable decisions taken by banks are ring-fenced from any regulatory backlash. In other words, once the decisions are taken with full backing of oversight committees and RBI, the bank officials involved in the process will not be subject to any investigation.
Armed with powers under the amended BRA, RBI identified 12 accounts which constitute around Rs 250,000 crores [25% of total stressed assets] and directed concerned banks on June 13, 2017 to initiate proceedings under the Bankruptcy Code. Accordingly, banks finalized petitions and submitted to National Company Law Tribunal [NCLT] for consideration.
But, regrettably the defaulting companies e.g. Essar Steel [it owes about Rs 100,000 crores] has challenged the petition in Gujarat High Court [GHC]. GHC has for now stayed the banks’ petition in NCLT. If, the stay is not lifted, this will be a huge set-back bringing to naught all efforts put in by Modi – dispensation.
The problem facing the banking sector especially PSBs is generic. While, on one hand, industrialists/big businessmen – enjoying cozy relationship with bank top brass/bureaucrats/politicians – got easy access to resources of the banks, on the other, it was mountain of a challenge for the latter to recover these from the former. The whole process worked something like this.
Leveraging the cozy relationship, banks gave loans worth thousands of crores to conglomerates [albeit favored] without conducting due diligence and assessing viability of the projects. They continued to get more loans despite their poor record in servicing of previous loans and poor performance and negative net-worth of the projects [e.g. Kingfisher] for which those loans were taken. The borrowers also diverted borrowed funds for personal use via shell companies.
In several cases, loans given for projects in telecommunication, power and steel on the strength of licenses viz. coal mines and spectrum/radio waves got in to trouble because the licenses [bedrock of such projects] were obtained by dubious means. When, those licenses were cancelled as per the orders of the Supreme Court [SC], the projects collapsed disabling borrowers from paying back.
The banks had little to show by way of tracking and surveillance; far from that even after a loan turned NPA, this was not reflected in the balance sheet thereby preventing corrective action. Only after proactive intervention by RBI, these were recognized. Even thereafter, it is ironical that powers that be have paid little attention on recovery and making borrowers/promoters accountable.
Instead, they have come out with a spate of schemes viz. 5/25, SDR [strategic debt restructuring], S4A [scheme for sustainable structuring of stressed assets] etc all aimed at diluting the burden of loan repayment. For instance, under S4A, up to 50% of the loan is converted in to the so called ‘un-sustainable debt’ – a euphemism for extinguishing it by treating this as equity in the hands of lender.
It is only now that Modi – dispensation had starting acting tough by removing all hurdles viz. legal, procedural, technical forcing action within precise timelines. But, now the judiciary is coming in the way that too on frivolous grounds [why action against X and not Y or Z?]. This will only give more leeway to defaulters and delay liquidation of the defaulting companies.
The prime minister [he has zero tolerance for corruption] has taken all the right steps to break the nexus between influential borrowers and bureaucrat/politician, insistence on bank top brass to conduct due diligence, strict monitoring and surveillance and preventive action etc to ensure that there is no repeat of NPAs.
However, there is urgent need to address the existing NPAs which are incapacitating PSBs in turn, affecting credit flow and growth. Even as Team Modi has fired all cylinders to deal with them, courts also need to extend full cooperation.