Replying to the debate on President’s address during the opening of the budget session of the parliament, prime minister, Modi squarely blamed the erstwhile UPA dispensation led by Congress for the most serious problem of NPAs [non-performing assets] of the banks – mostly public sector banks [PSBs].
What Modi was alluding to was that there had been massive proliferation of loans given by the banks on the directions of the ruling political establishment to favored industrialists and businessmen without conducting due diligence, assessing the viability of the projects/businesses and seeking mortgages. During 2008-2014, loans worth Rs 3500,000 crore were given.
A big slice of these loans turned in to NPAs. Yet, these were kept under cover even as a host of schemes viz. 5/25, strategic debt restructuring [SDR], corporate debt restructuring [CDR], scheme for sustainable structuring of stressed assets [S4A] etc were brought in to restructure and make them look like standard assets. For instance, under S4A, up to 50% of the loan is converted in to ‘un-sustainable debt’ – a euphemism for extinguishing it by treating this as equity.
Within a short span of assuming office, the RBI ordered an asset quality review [AQR] of the banks in 2015 which resulted in NPAs getting reflected in their books currently estimated at about Rs 837,000 crore [as on September 30, 2017] of which the PSBs alone account for Rs 734,000 crores. Modi – government deserves credit for recognizing that the patient was suffering from serious ailment. But, what about the treatment and putting him in recovery mode.
It has set up mechanisms to make it happen. In 2016, it passed a law on Insolvency and Bankruptcy Code [IBC] to enable lenders initiate insolvency proceedings. In 2017, it amended Banking Regulation Act [BRA] giving RBI powers to order banks take action against defaulters. Following this, the apex bank sent two lists of major defaulters to banks take up resolution in fast track mode and in case not resolved [within deadline] make reference to National Company Law Tribunal [NCLT] – the authority for insolvency proceedings.
Meanwhile, on February 12, 2018, RBI has gone 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 [until hitherto, the focus was only on accounts 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 first such weekly report shall be submitted for the week ending February 23, 2018.
The apex bank has abolished all existing mechanisms including extant schemes viz. 5/25/SDR/CDR/S4A. The Joint Lenders’ Forum [JLF] – an institutional mechanism to coordinate actions on cases under consortium lending – has also been abolished. All accounts, including those where any of the schemes have been invoked but not yet implemented, shall be governed by the revised framework.
The new architecture for recognition of stressed assets, their reporting, and resolution is truly extraordinary and lays the foundation for preventing recurrence of NPAs in the future. This also minimizes the possibility of loss/haircut that the banks would incur in the event a satisfactory resolution is not possible and the account is referred to NCLT for liquidation under IBC.
But, the cost of implementing the action plan in the short-run is huge. In fact, one shudders to fathom the consequences. First, in view of stressed assets those are in default for period 60-90 days also being reckoned as potential NPAs, this itself will boost the total such assets by a whopping Rs 280,000 crore.
Second, the haircut expected to be taken by banks in the event of NPAs going under the hammer could be in the range of 50% – 80% [based on the 12 first set of accounts accounting for about Rs 200,000 crore worth loans referred to NCLT – under directions from the RBI]. This leads to steep erosion in the capital of the banks. While, 50% has already been provided on mere reference, more erosion will follow.
Third, in case of PSBs, the government will have to pump in huge amount of capital to salvage them. Already, infusion of Rs 211,000 crore has been announced. This will upset its fiscal deficit notwithstanding a big chunk Rs 135,000 crore being given via bonds which does not entail cash outflow. In turn, this will adversely affect all macro-economic parameters viz. interest rate, inflation etc.
Fourth, there are many more skeletons in the cupboard which may tumble out any moment. A very recent example in this regard is embezzlement of a mammoth Rs 11,400 crore by a diamond merchant from Punjab National Bank [PNB] via blatant misuse of LOU [letter of undertaking] facility. This will exacerbate the NPAs and the need for government to infuse more funds.
It may take a couple of years for the economy to retrieve the damage inflicted by what Modi aptly described as “the sins committed by UPA regime”. Nevertheless, there is solace in the fact that systems have been put in place to prevent recurrence of such sins in the future.