Bad loans: Bankers in favour of RBI‘s new framework

Once, one bank puts a loan in the SMA 2 box, all the lenders to that borrower should form a joint lender forum led by the bank with the largest exposure. The forum must first try to rectify the stress by asking promoters to put in money, sell off non-core assets or get another equity partner.

However, where the lenders forum finds out that rectifying won’t work, they may restructure the loan taking appropriate personal guarantees and collateral. If the forum finds that restructuring won’t work, it may resort to recovering what is left of the asset.

The forum has only 30 days to arrive at its solution. For loans above Rs 500 crore, the forum must seek advice from an independent evaluation committee to ensure fair restructuring.

Loans under restructuring will attract lower provisioning of 5 percent. But if lenders fail to resolve SMA 2 loans early, they have to provide more; 25 percent in the first year, instead of 15 percent currently.

Moreover, RBI is also looking to using asset reconstruction companies more liberally. Banks will be allowed to sell SMA 2 assets and not just non-performing assets to asset reconstruction companies. They can write-off their losses from such sales over two years. There will be special entities set up to buy troubled companies, which can even get bank loans to buy troubled assets. So, the idea is to attack the bad loan pile up in many ways.

To anlayse the impact of these rules Latha Venkatesh of CNBC-TV18 interviewed SS Mundhra, chairman Bank of Baroda and Vijayalakshmi Iyer, chairman, Bank of India.

Transcript of the interview on the next page

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Latha: The RBI’s first step is to have a central repository of all the loans that are showing some stress; any loans above Rs 5 crore you already have Credit Information Bureau (India) Limited (CIBIL) collecting some kind of data. Do you think what the RBI is asking is way different from what CIBIL offers, is it going to make a big difference for you to assess your borrowers stress?

Mundhra: It certainly makes a big difference and it is vastly different from what CIBIL does. Firstly, one must understand that above a cut-off point it is being made available to RBI as a particular frequency and I believe finally as the system develops, the information which is aggregated would be available to the players in banking industry on an on-going basis and real time basis.

See CIBIL data is on demand, on a specific thing, from that perspective I think it will be a much robust system. This will make the availability of information almost on real time basis which makes it easier to decide further course of action, or evolve, or at least introduce the resolution plan with speed and I think that was the intention.

Latha: Do you think the RBI should do something to ensure that this data is available even for healthy loans not just for bad loans because often when you give a loan do you have full idea of the liabilities of the company or the promoters? Should this repository be extended you think?

Iyer: Yes, I totally agree with you. I think they should definitely extend this even to the good loan accounts because that will certainly given an idea of the liabilities with other banks. In fact I would go one more step. If they can extend this even to the NBFC’s that would be good enough because many of the companies do go to NBFCs and take loan against pledged shares, which we often don't come to know, and we come to know only at a very late stage.

Latha: Once a loan is not paid for the 61’s day that is two months of interest is not forthcoming then the loan will be mentioned as a SMA 2 and a joint lender forum will be called that is all the lenders to that loan will have to form a joint lenders' forum (JLF). Now already you have a corporate debt restructuring (CDR) where lenders meet, you also have consortium accounts where lenders meet; you have a multi-bank arrangement (MBA) where lenders meet. So is a JLF needed, are there a lot of accounts where many banks are lending but banks are not deciding together?

Mundhra: See what is different here is as you rightly mentioned CDR comes at a later stage where you establish that now is a case which is fit for restructuring. Coming to consortium there are cases there our lenders within the consortiums, lenders who are even outside the consortium, in multi banking there may be a formal group, there may not be a formal group.

In consortium also there may be a meeting but there is no defined timetable, there is no incentive that you meet within a time and there is no incentive if you delay. I think that is a major difference that here you have a set timeline.

Latha: There is a timeline given out, that is the basic difference now. Do you think the timeline will be a major stick that will make the lenders take decisions quickly? We know that sometimes people tend to delay decisions because there is a change of management, a change of chairman. Will this be a stick enough to force people to decide quickly?

Iyer: Yes the time given actually in the framework is too stringent of 30 days to come to an amicable discussion, resolution etc and thereafter 15 days for taking decision. This is really going to be very stringent and it will be difficult for the bankers to comply with because before we arrive at whether the unit is technically feasible and financially viable, we need to carryout even the forensic report at times, audit report, stock audit. Infact we have requested the RBI to look into this and relax this norm and perhaps they may be doing it.

Latha: How many days do you want, they have offered 30 days?

Iyer: It should be at least two months and it is very much required.

Latha: You agree with that and will the RBI relent?

Mundhra: A change anytime is painful and I agree that at this point of time it may look like a very challenging timeline. But if I reflect back in 1991-92 when first time income recognition and asset classifications (IRAC) norms were introduced, there was same kind of apprehension but then the systems were fine-tuned and ultimately the industry learned to live with that and it has proved beneficial.

So, at the end destination the timeline ultimately this should be. However, we prefer that it come in stages; so initially there may be some more time as you gain experience and you start talking to each-other and then slowly you ultimately reach to the goal.

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Latha: What the RBI expects is that the first stage is rectification where bankers talk to the promoters and try to get them to bring more money or sell non-core assets or correct the loan before it turns bad. In your experience do you think promoters if approached on 61’s day or before the 90th day do have that kind of money to put in or do you think that they are usually in a state where they are defaulting because they really don't have any means to improve the asset?

Mundhra: You have hit the bull’s eye. In this universe there are two kinds of people, one are those who have the capability but who are not doing it. However, in overall scenario such kind of people are always there but in minority. In today’s environment, there are two major sectors. One there has been a considerable slowdown in GDP, which we all know and the fall has been quite sharp. With this kind of slowdown in GDP automatically means that the entire payment cycle in the economy has slowed down. So the cash flow for the people who are required to provide the cash flow to the bank, that itself has slowed down, the payments are held up at various stages that is one point.

Second is many projects which are languishing because of non-financial reasons, for clearances, for the permissions, these are the kind of cases where despite all the willingness there may be genuine difficulties. So it means that the first stage of recovery or rectification may not be immediately possible because rectification capability is not there. It means there would be the case which will be falling under the stage of restructuring at this point of time. But there are cases where people can serve and they will have to serve otherwise they will get into a category.

Latha: In your estimate what percentages of cases do people have the money and still don’t bring it? How much of NPLs may the system save 10-20-30 percent?

Mundhra: At any given point of time in the overall universe these people are in minority. In percentage terms, it would be wild guess but in today’s environment probably 70-80 percent people may be such who are either suffering from cash flow or delays for various reasons.

Latha: Then there is a question of over Rs 500 crore loans require and independent evaluation committee, is that a good idea?

Mundhra: We had expressed that the Corporate Debt Restructuring (CDR) forum itself is quite well-established and CDR empowered group is also there. Probably it would be better that within that group they can keep on availing the services of various experts depending upon the kind of projects which we are discussing because a separate group, now how big this group will be, whether it will be able to bring expertise into all kind of activities, what will be the nature of recommendations, the advisory mandatory, semi-mandatory, I think those kind of issues are there.

I still believe that to provide more such kind of capabilities at CDR level and allow them to draw from the expertise, would be probably a better idea because the apprehension is that at the end of the day we should not end up creating one more layer, or in case there is some different kind of view point on the observations then it should not create a dilemma in the mind of players, which in turn ultimately delays the entire process.

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Latha: The penal provisioning, if an agreement is not reached in spite of a loan being recognised as SMA on the 61st day and a joint lender forum being formed, this penal provision of 25 percent provisioning in the first year of NPL, is that stick enough to make banks agree?

Iyer: I think RBI should seriously consider bankers request for not insisting for such a steep provisioning. In fact as such banks are subject to so many different types of provisioning, one standard provisioning then specific account like on NPA, then on NPV, mark-to-market, then floating provision, then they are thinking of doing dynamic provision, then again unhedged provisioning and penal exposures provisioning.

Latha: Most of you anyway provide more than 15 percent, in good times I know that you all will provide 40-50 percent - as well for those who are not falling in line will his not make them come to the table?

Iyer: Even otherwise bankers are a disciplined body; I don't think there is a need for an accelerated provisioning.

Latha: Do you agree?

Mundhra: There are two kinds of situations; part of this argument will become irrelevant as we enter March 31, 2015. In remaining part ultimately we have to appreciate the underlying philosophy.

The underlying philosophy is that if there is a group of lenders and if this kind of weaknesses are there, if they come together there is a possibility that the account would regain healthy status fast. If it is going to delay then it automatically means that it will move towards becoming an NPA.

But I agree with Iyer that yes there are a number of things which need to be done …

Latha: I spoke to retired bankers and they candidly admitted that very often bankers have delayed taking decisions. This is only a disincentive against procrastination. If you take decisions you are rewarded with lower provisioning. This is a good penalty to make them not delay?

Mundhra: That is exactly the point I made that underlying philosophy is exactly the same because if you delay then asset will only get deteriorated in any case.

Latha: So you think the penalty has a place?

Mundhra: What I was trying to say that these are all the things which need to be done  but only convergence of everybody at one point of time is probably something where there is a case to provide little timeline to make the implementation more smooth and feasible.

Latha: Let me come to the other penal statement which they are making that non-cooperative banks will invite special negative supervisory view during the supervisory review that is negative comments from the RBI in their annual inspections. First of all who will complain saying that this banker did not cooperate, do you see one of the bank chairmen saying that about another bank chairman or another bank as well if the RBI were to make that comment in the supervisory report, is that a big stick that can make people behave?

Mundra: I think we have different category of bankers, I have yet to see a category of bankers which can be put under non-cooperative bankers so I don't think that there would be any non-cooperative bankers. Yes, there are bankers for the non-cooperative borrowers and I think in the context what we are discussing - identifying the non-cooperative borrowers and putting penalties for them, that is what is going to happen more.

Latha: Because of this framework how much do you think the extent of NPLs may be reduced in the system, do you think the system will have 10-20 percent fewer NPLs?

Iyer: The guidelines are only for recognising the early symptoms and taking a resolution, because of the guidelines, of course there will be early resolution of the NPAs because the economy is still under stress so what one can expect is a quick resolution of the NPA and that is a welcome step.

Latha: So you may perhaps save about 10 percent of the assets which otherwise might have died because of delays?

Iyer: Difficult to give a number but of course we can safely say 10-15 percent.

Latha: Do you think P&Ls of banks at least in the first two quarters of FY15 or may be all through FY15 could be impacted as you have this early recognition and probably penal provisioning, do you think there is some negative impact on bank P&Ls?

Mundra: It will suffer for those who failed to become a party in early resolution, those who put up a system and move towards early resolution I don't see any reason why for them there should be any enhanced provision.