NPA mess: Acceptance, flexibility among players needed

One of the main problems weighing on the market is the stressed asset situation. Some of the biggest names in the industry believe that acceptance of the issue and flexibility will be a way out of the problem. Speaking on the sidelines of Edelweiss Credit Conclave, Seshagiri Rao, Joint MD & Group CFO, JSW Steel said that all players including bankers, Asset Reconstruction Companies (ARCs) and bankers must be flexible enough to find a solution.“The problem is of ä cyclical nature as well as a structural issue,” he added.On the other hand, Cyril Shroff, Founding Partner of Cyril Amarchand Mangaldas believes that the biggest challenge is acceptance of the issue [stressed loans]. “An environment of comfort is needed,” he said. RK Bansal, Executive Director of IDBI Bank believes that 80 percent bad loan issue in road and power sectors will be resolved over a period of time and about 10-20 percent will have to be written off. Banks, however, will have to take a hit, he added. Below is the verbatim transcript of the discussion.Q: First and foremost, let me start with the strategic debt restructuring (SDR). What is your estimate of the inadequacies of SDR? Do you think more needs to be done by way of changing rules? Bansal: I think the experiment which we have been doing with SDR, initially of course we were hoping for us it could work in many cases but I agree with you, it has not worked in many cases. I will tell you the reasons, one is, this so called upside because of the SEBI price formal, it does not work. When there is stress in the company in any case the value of the share is much low. There are other issues, I think the resistance to the overall change of the ownership, I think the problem is we have called change of management but in India it strictly becomes change of ownership. So, the real resistance to that – so my feeling is it will work, it will work in a middle-sized company, it will not work in the larger projects, larger cases which are in picture. So, there we need perhaps some other solution. Many bigger cases which are there in fact which we are talking of stress, whichever industry you are saying, they don’t have SDR provisions, so we need promoter’s cooperation to go ahead with SDR. Q: That was my next question, can it be done in a hostile fashion, can it be done only if the promoter cooperates because after all you need a resolution that the SDR will allow conversion of debt to equity? Bansal: Certainly, to pass those resolutions for SDR you need promoter’s cooperation. The clauses which are there in adjusting cases mainly in the earlier restructured cases, so, actually whatever names you have heard in about SDR, about 15-20 cases, 90 percent of those are cases which were earlier restructured. So, they have some sort of a provision in the system. However, otherwise the new cases which were not restructured, they don’t have those provisions. So, if we have to convert, we need the cooperation of the promoter. Q: Is it legally possible to force a hostile promoter, a non-cooperative promoter to convert. Does the law need to change, do the regulations, notifications need to change? Shroff: Short answer yes the law needs to change and what RK Bansal said is true that this is result of a lot of legacy agreements and documentation and that we are trying to superimpose a system that was subsequently evolved and there are the gaps that need to be filled. So, practically speaking, it is not possible to give full effect to the SDR mechanism without the cooperation of the company and the promoter. However, I just want to add one more insight into this in terms of what is and this is the perception of what is driving the banks on the one side and what is driving the promoters on the other side. At this point, from a bank perspective or from the lender perspective, this is seen as somewhat of a soft option because it allows the postponement of how you sort of classify the assets. So, it is a bit of intellectual fudge that is sort of going on. Q: Not anymore, the Reserve Bank of India (RBI) has told them to proactively provide 15 percent in the first year. Shroff:  It is certainly one of the drivers and secondly from the promoter or from the company’s point of view, it is not seen as the worst case scenario because there is a lot of other scenarios that are playing on in the marketplace at this point of time where there are far more severe consequences that can be visited and compared to that this is seen as a sort of a softer option. So, there are enough drivers on both sides to cooperate. However, to answer your question squarely in terms of can you force it, there are severe limitations on doing it; the law will need to change. Q: What exactly has to change? Shroff: It will require effectively the ability to dispense with the consent even in the absence of contractual provisions. Some of what theoretically can happen under the Bankruptcy Code may do away with some of these issues of seeking consent because that is where legislation has stepped in. Q: I am going to try and restrain you from jumping to that because first the act has to be passed, after that all the intermediate institutions, the plethora of National Company Law Tribunal (NCLTs), the tribunals have to be setup, the profession of investigating officers and agencies have to be setup. It does look like we are more than a year away from an ecosystem being created considering that we don’t have the Bankruptcy Code yet. What happens when you have an uncooperative promoter? Won’t he follow a scorched earth policy?Jayesh: Most of the SDR cases are where Corporate Debt Restructuring (CDR) or Joint Lenders Forum (JLF) is sort to be done and contractually clauses were embedded allowing conversion. Now, if you don’t have the contractual ability, one other mechanism which used to work in the past and I say used in the past like maybe well before Sikka came in was you take a company in winding up, then you don’t need shareholders consent.In the winding up you present the scheme of arrangements where only the creditors matter, where you are selling off the asset into a new entity, you create a new company effectively and you can restructure that debt. In fact if you look at the JLF circular before the SDR, it talked about possibility of transferring equity of the company by the promoters to the lenders to compensate for the sacrifices. We haven’t seen those instances. Even when SDR was announced, for me it was little baffling as to why are we not forcing the promoter to do an equity-debt swap.  Q: Buy you yourself answered your suggestion of winding up. It is not worked or is not working now in the recent past. Effectively that obviates, that removes that as a way of solving the problem. So, we are falling back on SDR so how would you rewrite the SDR rules or any other laws?Jayesh: Cyril Shroff rightly said that some change of laws is required and one key thing which SDR didn’t think through and which now some of the banks are suddenly waking up and really worrying if not spending sleepless nights is the promoter may have defaulted on PF contribution and whatnot other violations and suddenly the banks are now majority owners so their nominees will be Directors and in India the authorities love to go after the new guy in power. Q: What can you do to ensure that the sins of the previous promoter are not visited on the bank Director? Jayesh: Sounds like a very conceptual answer but far greater coordination between the various arms of the government and therefore also of the central bank. Lot of powers are already there, lot of laws are already there, it is just the coordination and enforcement which is lacking.Bansal:  That is a very relevant point and that is why, if you see, initially there was a feeling and as Mr Cyril pointed out that bankers were thinking that it was standard, so I can keep it for 18 months and borrowers were thinking, I am owning the company also and in any case, banks will not take action against me. And now, after clarity from RBI, banks are very clear and RBI advises very clearly that the adjusting promoter has to go away. Initially that feeling was not very clear. That has also hit the SDRs now. The other thing is this problem about the statutory tools. So, now where we are very clear, we are going through a transparent process. Other agencies also came into picture in any case. So, now we are going through an advertisement. We are asking bids. Otherwise, promoters were bringing their own people here and there. And we are ensuring most likely in most of the cases that we exercise SDR, we change the management at that point of time. We do not want to wait for 12 months or 18 months. We want to find a buyer first and then go through the process. Q: What changes are needed and if you can predict when the first SDR transaction will happen.Rao: In my view, the SDR mechanism, the way it is structured, it is too rigid. What we are finding today, when we want to negotiate with the lenders, if anything which is a little different to what is written in the SDR mechanism, bankers are not taking a call on that. This is our experience. But at the same time, SDR is the ultimate – ultimate in the sense earlier, we have restructured or proposed to do something through JLR, all failed. That means management change is only way of doing through SDR route. Contractually, assuming that there is a possibility of converting debt into equity at whatever value that comes through, eventually the decision making has to change in the company as Cyril pointed out, not only just change on control through shareholding or ownership, decision making also has to change and the driver seed should be who from the day the SDR comes into existence, that is also one of the important points.Otherwise, we are destroying value further wherever SDR has happened. We have seen companies coming or managements coming and handing over the keys to them, that you have to now handle things. So, therefore, SDR in my view, if it has to be successful, before they take a call, that SDR has to be done, buyer has to be identified, all terms and conditions are to be done, contractually, they should be in a position to change the decision making to the new buyer and flexibility to accommodate what the buyer requires. Thereby value can be created.One more point I would like to add. For instance assuming SDR is resorted to, subsequently, the asset is sold to asset reconstruction company (ARC) there is a possibility, the existing promoter which bankers are looking for change, he can buy again from ARC. That is to be blocked.Q: They have blocked that the company put under SDR is not bought by the same promoter or his proxies. But ARC angle also has to be looked at. Anything you want to add to the process?Gandhi: The problem in some of these companies as we see it is currently, equity value is very low. Debt burden is high and earnings before interest, taxes, depreciation and amortisation (EBITDA) is low. In order to convert to 51 percent of equity, you are going to convert a very small sliver of debt into equity. But the outstanding debt still remaining will not be serviceable by the EBITDA that is being generated. And that is the problem. So, we need to think those through.Q: Those have been analysed and the takeaways are with all of us. There are steel plants, where if you after converting the minor sliver of debt into equity will be Rs 30,000-40,000 crore with the EBITDA probably Rs 3,000 crore or even less and therefore completely unable to service. But again, it would be the banker who would have to take the hit.Gandhi: At any given point in time, you have to look at an asset and you have to think what is the value of this asset today. It does not matter what you put in the ground. You may have put in Rs 50,000 crore to create it or Rs 5,000 crore. The replacement value is one way to look at it and what is the going concern value is the other way to look at it. From an equity standpoint, you have to look at going concern value.Q: Let me make it very clear. I am here on behalf of the tax payer and the depositor. I am not here on behalf of the promoter. So, I genuinely want to know from all of you, is there any suggestion in the SDR so that the banker gets his money?Shah: The fact is that a lot of the projects for various reasons either undercapitalized by equity, external world change, approvals did not come, all of those, there is an inherent risk in that. And I do believe that if you analyse the entire stressed situation in India, a large part of this is project risk and that is a fundamental problem of non-performing assets (NPA) in India. To answer your other question, the risk is inherent. Some of the NPAs have happened. Now, do you want to cry over that and recovery every penny that is there or do you want to be pragmatic and say that I have already provided for some, I will provide some more. Maybe I will get some upside if economy comes back. I would strongly also recommend let us also be more pragmatic and say how to go forward because Indian economy is risky and there will always be risk. The promoters will take risk, the banks will take risk, unfortunately, in this current instance, we feel that the promoters have taken a smaller amount of risk with much higher potential upside and the banks have taken a much larger share of the risk with much smaller upside.Q: That is my problem. If you are going to go and tell the banker, you have Rs 30,000 crore of debt, about Rs 500 crore will become equity and of Rs 30,000 crore, Rs 29,000 crore you write off, the remaining Rs 500 crore, you look forward to the future when your probably Rs 500 crore equity will become Rs 1,500 crore equity. You are asking them to take Rs 29,000 crore hit. It does not make sense. From Bansal’s point of view, it does not make sense to me. Does it make sense to take away Rs 29,000 crore off? You think it still makes sense? I am on your side.Bansal: No, it does not make sense, but anyway let me just come to one or two other points. As Rashesh mentioned, we used to do project finance. I also started in that. And we used to have a convertibility option of 20 percent of the loan, which has worked well to some extent. And those days, we had equity even in the greatest of the blue chips today. We have also gone through the first round of restructuring in CDR and including some of the big steel companies which were restructured at that point of time, they all did well later on. Now, that convertibility option, perhaps, all the project finance loans should have, but somehow because of pressure from industry, it was removed. The other issue is if your loan of Rs 30,000 crore, them certainly the problem is the equity value is so small that to own 51 percent itself, you need – in some company I did one SDR, I needed only Rs 50 crore. Now the debt is Rs 1,500 crore, just to convert Rs 50 crore, to get 51 percent or even 90 percent, it is not going to reduce. But coming to that same point, that is why I was making that point, today is not the right time perhaps, to sell the steel plants. Of course, if the haircut is Rs 29,000 crore, nobody is going to do, but certainly, we can convert some into equity, let us say, you convert Rs 2,000 crore into equity out of Rs 30,000 crore example which you gave. I can convert maybe Rs 8,000-10,000 crore into preference shares which is an indirectly haircut, a deferred haircut and then balance that can be sustainable. The steel industry has an economic issue, a worldwide issue basically. At least there is a plan, but there are many other segments where we do not have the assets. So, we have to worry more only about those companies.Rao: Because Latha is raising a point that banks have to lose money, banks have to get back their money.Q: Some money.Rao: No, full money. I can tell you full money. But there is an example which I want to share with you. I will take two minutes. There is a steel company in India, in the year 2005 which was sick. It was not operating fully. It has a debt of Rs 1,000 crore and then it was offered to us. So, we went and said Rs 600 crore is unsustainable debt. Balance Rs 400 crore debt we will take but Rs 600 crore, we structure in a manner, that the conversion of this Rs 600 crore at Rs 60 per share within five years, banks have a right to convert or company can force conversion, then Rs 600 crore is not to be serviced, but Rs 400 crore debt we will take. Existing promoter will sell its equity at Rs 1 per share. Market price was Rs 8 at that time. Banks have agreed. If conversion is not exercised within five years, retrospectively this loan will carry an interest 12.5 percent. This is the structure. We took over the company and we turned around and the share price went to Rs 100.Banks have converted, made full money, company has not serviced. My only point is as long as SDR provides flexibility, to have this type of structure, still it is possible. Therefore, banks will not lose money, whatever conversion that is taking place at a higher price, if banks feel it is a haircut, then it will never happen. Therefore any prospective buyer who has a plan to turnaround the company, if that can be done, if it is workable in the view of the lender, if this type of structure is possible, if it is a part of SDR, I think it is possible for the banks to recover entire money. The mindset today is by converting into equity at a higher price than the market price they will lose money or somebody will point out, our Central Vigilance Commission (CVC) will question, Central Bureau of Investigation (CBI) will be after them. These are the problems which the bankers are facing. The buyer has no flexibility today to have any structure. I feel this should be there.Q: The asset reconstruction company (ARC), it is the oldest that we have practically speaking in terms of revitalising distressed assets. However, I don’t know if the record is very good. For starters, ARCs are two decades old in India, what do they have to show?  Shah: ARCs are about 11-12 years old but if you go back to the history of ARCs, it has evolved. One of the fundamental questions about ARC has been are they agents of the bank or are they risk capital providers to the banks. If you see the origins of ARC, they were supposed to be agents of the bank. Even before 5:95, we had zero percent by ARCs. So, ARCs became recovery agents of the banks. Then RBI came and said 5:95, now it is 15:85, I think we are going slowly towards ARCs becoming risk capital providers on the bad assets to the banks and on this front ARCs are fairly new, there it is only last three or four years and as you said, there are special situation funds in ARCs but now RBI is truly seeing ARC as providers of risk capital to the bank in part becoming pari-passu.The other fundamental evolution that has happened in the ARCs is earlier they were as I said agents, it was an outsourcing job. Now, they are truly becoming owners of the new assets. So, even that has started to change and even that is last three or four years. I think ARCs have done a fairly good job in the last three to four years in couple of areas where there are smaller loans under Rs 500 crore because then the banks have been able to sell it at a reasonable price. If you go to a banker and there is a Rs 100 crore loan which has real value of only about 35, the bank is happy to sell it at 35. However, if it is a Rs 5,000 crore loan, the banks don’t have the capacity to take that kind of a haircut. The other area ARCs have had a fairly good track record is in financial restructuring. Our own experience in our ARC has been that wherever there is a financial restructuring, either you sell the non-core assets, you convert debt into equity, you put in some what is called priority funding, you provide the last mile financing to complete the projects, on all of that, especially for smaller loans, under Rs 1,000 crore because if it is a Rs 1,000 crore loan which I have bought Rs 300 crore, I have to give another Rs 40-50 crore to just cleanup the last mile financing, it is within the capacity of the ARCs and ARCs have done a reasonably good job in this arena. Q: There is just one doubt I had from the way you described the process, it has been very difficult to throw out a bad management so it looks like at the end of the process the banker would have lost 65 percent but the promoter would have got a good company? Is that how it works? Shah: Not always because we ensure that even when the Rs 1,000 crore loan is say given at Rs 350 crore, the other Rs 650 crore is not a haircut that is provided. This is what the bankers have sold to the ARCs but the ARC and the banker still have upside and it is the job of the ARC to make sure that if it is a good asset and there is equity value creation as earlier the example we saw, that the banks do get some of the upside. However, the upside should come out of recapturing the value rather than trying to sell the asset and things like that. Q: But doesn’t the promoter get more of the upside and the bank maybe a delayed and diluted upside? Shah: I will give you an example. We acquired an asset; the promoter owns 70 percent of the company. Again a Rs 1,000 crore loan at Rs 350 crore and all that, the promoter owns 70 percent, his obvious original answer was I will keep all the upside, you have taken the haircut unfortunately, thank you very much. We sat with him and said no we need to have some equity for the haircut that is being taken. He offered 5 percent of the equity, so, he will keep 65 percent and you will take 5 percent. We said we will keep 55 percent and you keep 15 percent and it started. ARCs can do something like this because as I said, this is all financial restructuring. Eventually we have agreed at a 40:30 where the 40 percent of the upside comes to the banks and the promoter still keeps 30 percent. So, we have to be pragmatic, it has to be win-win-win. It has to be win for the company, win for the promoter and win for the ARC and the banks also because you can’t just take an extreme answer where either you throw out the promoter because in a lot of these cases you need the promoters because there are so many things in the company about TDS and statutory dues and all of that.  Q: Now the rule is that 100 percent foreign direct investment (FDI) is allowed and 100 percent ownership is being contemplated by one owner not yet allowed, plus you can sell the security receipts (SR) to NBFCs. Is it going to make a big difference, the FDI? Jayesh: I think so because in the past some of the foreign credit wanting to come in used to say that why should we come in if we are not going to get full upside and there are 9-10 applications lying with RBI. Some of them are people who want definitely 51 percent plus if not 100 percent. So, that is going to be a game changer. Even the SRs, there is another aspect which still needs to be completely resolved which is this 15 percent funding, my understanding is RBI came up from 5 percent to 15 percent or from 0 to 5 percent and then 15 percent is that to push the banks into doing transactions at more realistic value as against completely cashless and the sale values were not really mapping the market value. If that is the case then how does it matter whether 15 percent is generated by the ARC on its own or it gets a third party funding which there is no clarity. We believe RBI should be indifferent that ARC can issue structured products to then get funding for the 15 percent or even take a bigger stake and then take the equity upside because if the banks have not succeeded doing the workout and if the ARC is going to do the workout then the larger part of the equity upside should be going to the ARC because that is what they are doing. There is one other interesting concept, two related points actually, from the beginning in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act we had this change of management. RBI took some 10 years to come out with norms therefore no change of management happened for the first 10 years. Even after the norms have come out, I am not aware of any single institution where change of management has happened. One unworkable provision is that when the lender has recovered the amount, you are supposed to hand back the management for free. Now why would anyone come in to run an industrial outfit to help the creditor recover the money and then just walk away? Q: I thought the RBI was cognizant of it and wanted to change the rules? Mahapatra: I think this is part of the Sarfaesi Act itself. So, this is the law and once the law is amended, this will happen. Q: Is it part of the amendments that is being contemplated? Jayesh: I don’t think so but there was a 2011 committee, I was on that and we made these recommendations strongly and therefore the related point is we talk of even in the SDR wanting to change the management and not just the ownership, are we looking at bringing the concept of managing agency back? Q: But should we not? Jayesh: I believe so because it is time we start looking at and valuing specialisation. Why the managing agency will work is that is the guy who is going to come and battle out the promoter if the promoter is not cooperating, that is the guy who is going to come and deal with the various regulatory authorities, licenses and what not and ensures the plant continues running, economic value is not being further destroyed and slowly start increasing the economic value. So, he has to be compensated for that and that compensation can’t be that okay we give you annual 0.5-1 percent management fee. Again, economic upside has to be there without any financial investment being made. Q: So you are speaking about two changes really. Evolution of a management agency but can we just wish it because this is a whole profession and an institution that has to evolve. Wanting it doesn’t mean it will get created? Jayesh: Evolve in the sense it can happen. I don’t think you need to wait for the ecosystem to come in. There are people, there are enough Indians for example who have done this outside India and they are happy to come back. Q: You want the rules to change so that they get a better deal? Shroff: I think the market, the slot in the market is there, they just need to be protected from some of the risks in order to allow them to come in. Q: So that would require rewriting what? Shroff: I think that would require two things, one is sort of a change in the approach of  the regulators and the judiciary because they would be the ones who would eventually visit the risk on them and perhaps an enabling change in the regulation which would give them some kind of indemnity cover. Q: In the Sarfaesi regulations? Shroff: Sarfaesi, Bankruptcy Code, Companies Act, whatever. Q: Bankruptcy Code as it is currently; as it was discussed we don’t know the final version is this taken care of to protect the new management from previous sins? Shroff: I think the law itself would -- given the manner in which the Bankruptcy Code is contemplated, the law would protect it because you could draw a line and say this was the past and this is the future. Shah: I will just add one small thing. As you said, I think this FDI 100 percent allowed, sponsors 100 percent, new investors buying SR is all part of the RBI move for ARCs to be a convict for providing risk capital in the bank and this is a very positive development. I think all ARCs will also have a fund underneath. All of us are contemplating a Rs 3,000-5,000 crore fund, a special situation fund so that the ARC model and the fund model can go hand in hand and truly start providing risk capital to the banking system which will be used for the banks for future growth and all that and I still believe that the ARC is not the only answer but they will be one part of the answer to get this asset transfer and the risk transfer done.Q: Special Situation Fund is kind of a new entity, maybe a couple of years. We have not seen it turnaround too many companies. What is your sense, the sense I got from speaking to some of the Special Situation Fund sympathisers is that as you just explained, they also don’t want the burden of debt to the extent that it spoils the current company from working. Is there a way Special Situation Funds can design the restructuring of the company so that the bankers also find it not killing? Gandhi: Rashesh Shah picked up on the right thing and I think Cyril Shroff said it there is no magic bullet. The way we are segmenting this and I understand for discussion purposes, we have sort of styloed the discussion into a few things but really isn't one or the other. It ends up being a mechanism where on a case-by-case it will be defined. In certain cases liquidation is the only right answer and I think ARCs are doing great job of liquidating. However, in certain cases that is not the answer. Reviving and getting the company back on its feet is the right answer. For that, it cannot be just an ARC, it cannot be just saying an SDR, we are going to need two or three things. We need to be able to take on and aggregate the debt, buy it at the right price so that essentially you can put a layer on top which is priced effectively and efficiently. You then need to have the ability to give working capital, the ability for the company to function and that debt needs to be provided. Then finally you need the right equity in the company. So, the effective answer is a little bit of everything we are talking about.Q: ARCs as all of you have said have worked in smaller cases, will the Special Situation Fund be able to scale up the model and make them successful for slightly bigger stressed assets?Gandhi: I think there is an answer here, there is the right answer and the answer is that banks, there is a little bit of everything and again we are trying to search for the perfect answer which is banks should not lose any money, funds should make excessively beautiful returns, there is a little bit of everything. There is obviously a return hurdle that we would want to meet, there is clearly some amount of a haircut the banks are going to have to take. Can we do the big ones; the question is can you take on a Rs 50,000 crore debt and can you get it done? I will tell you where the problem lies. Number one, the way the Indian banking system works, it is not just one bank you are dealing with, there is a consortium of banks on the other side. So, we need to be able to essentially have all of the banks talk together. If it is an ARC, you need to have aggregation of a significant amount of debt collected only then can you actually effectively put in a resolution mechanism. So, the answer is a little more complicated and as nuanced as oppose to a simple yes. Q: Actually, we should not be talking in extremes and I did not expect that Rs 8 lakh crore of stressed assets, nothing will be written down at all. But, do you see a meeting point here? The RBI has already asked you to take provisioning, probably 25 percent in some of the stressed assets. So, if the write-down is 25 percent, you have already provided for it. Is there a meeting ground there with the banks taking 25-30 percent? Will that be okay for the banking system?Bansal: We have to look into different segmentation perhaps. Industry which is having a temporary problem, whether banks convey it and the type of debt which is there, Rs 40,000-50,000 crore, perhaps immediately it may be difficult for the ARC to handle that because even if you say that banks are ready to sell at 60 percent, Rs 30,000 crore and 15 percent of that Rs 30,000 crore become Rs 4,500 crore. So, the ARC and Jayesh had made that point, this 15 percent, RBI should allow perhaps to come from Special Situations Fund. That can take care of some funding needs of ARCs.The loans which are let us say below Rs 3,000-4,000 crore, ARCs can handle. Smaller loans bank can settle and I really need to see Bankruptcy Code, how it really works out. If it works out something like Chapter 11 and then it can handle even bigger cases but otherwise, perhaps for bigger loans, banks have to do restructuring and do a small haircut, what you are saying as 25 percent provision. It helps, indirectly though banks are not liking what the RBI has done in the AQR or whatever, but certainly, it helps them to settle these cases and many of them, cases are not restructured and they were standard. So, that was becoming in fact, constrained. So, today, to some extent that will happen.Jayesh: Maybe it is time actually to set up a bad bank. Maybe it is time for the large assets, Rs 10,000 crore plus etc. to be swept into one bad bank. When the IDBI merger happened, they created Stressed Assets Stabilization Fund (SASF). What I understand, the track record has not been bad. They have done a decent job of recovery there. Maybe the top five to seven banks bad assets are pooled together and put into one bad bank and then maybe the way the things that resolve will be quite different.Mahapatra: I think bad bank is not a good idea.Q: Actually, I want to just put that to rest for two reasons. One it is not a good idea because we do not have time to discuss it at the moment. The second reason why is government does not have the money. You can put Rs 8 lakh crore, Rs 4 lakh crore, Rs 1 lakh crore, that Rs 1 lakh crore is not there. So, you cannot capitalise the bad bank. If you have no money, why talk about it and the other very important reason why the regulator is stymieing the bad bank argument is that then, a babu takes a decision, at what price you will buy from the bank, the market is not taking the decision and this just opens the gates for cronyism or charges of cronyism.Some quick thoughts on Bankruptcy Code, Jayesh since you are the participant in the commission itself, the committee which recommended, what is your success rate, what is your assessment of life after Bankruptcy Code?Jayesh: I was on the Resolution Corporation committee, not on the bankruptcy committee but related, yes. When I just started my legal career, we had Securities and Exchange Board of India (SEBI) coming into existence and we had Debts Recovery Tribunal (DRT) being created. Now, when you look at the two track records, there is a world of difference. I have my issues with SEBI and everybody in the room will have some or the other issues with SEBI, but nobody will say that they have not done a good job. However, can you find anybody in the room hand on heart who can say the same thing for the DRT? Then we had Sarfaesi, another sort of -- to borrow Cyril's phrase - magic bullet. It has not worked. I am worried that we are treating Bankruptcy Act also as a magic bullet. The issue is not new good laws, the issue is the mechanisms to administer and what appals me is the Bankruptcy Act will rely upon on DRT and NCLT. NCLT is nothing but the company law board.How many of you are aware that the company law board in Mumbai has not been functioning for a year. How many of you are aware that the debt recovery appellate tribunal in Mumbai has been non-functional for months? These are agencies under the administrative authority of the government of India, not under Supreme Court or High Court that you need to tango with the Chief Justice and get them working and all that.It may seem out of topic, but let me just make a point, in Singapore, the Chief Justice of Singapore spends every quarter time sitting with the judges giving them the performance reports on KPIs. This is the time you took to dispose, this is the time you took to write judgements after you heard the matter, etc. I do not see why the government of India, through ministry of finance and ministry of corporate affairs, do the same for the NCLT and DRT and put complete performance metrics in place that you have to deliver. The law say OA to be disposed in 90 days and therefore we are getting gung ho that the Bankruptcy Bill talks of fast disposal on all of that. However, it will be the same tribunals administering that law and I am worried this is not going to deliver unless we start with the new institution ground up which is completely performance driven and measured on that and held accountable on that.Q: Any thoughts on the bankruptcy even if it means smothering and sobering our hopes?Shroff: We should be a little careful in terms of trashing it before it is born. It is a well conceived legislation. It has challenges in terms of A: capacity building, more details being worked out as well. So, in the general sense of direction it is good. It is the same issue and there is one major stakeholder which has been left out of the conversation so far and that is the judiciary. Because no matter how wonderful a code you can write and how wonderful NCLT and everything will be ultimately the buck stops in the judiciary. And you know the state of affairs that brought our Chief Justice to tears.So, it was just interesting to see that all these years the litigants have been coming to tears and now the judges are sort of facing similar fate as well. They need to be brought into the conversation. Why does this whole bankrupt chapter work in the US because there is something like a Delaware Court or Chapter 11 courts which are very commercial. They are much sort of investment bankers and less judges and lawyers who do it. They are almost like bankers themselves. Unless we have a commercial solution oriented judiciary this ain't going anywhere. Once we bring them into the conversation and they are part of this resolution mechanism this will work. So, it is a great idea. The building blocks are there. We now just need to complete the conversation but let us not start on a negative note is what I would say.Jayesh: Just one quick point there. Advocacy as far as the judges or the DRD presiding officers, everyone concerned time value of money. I don't know what it will take us for them to get that point. Because otherwise day after day when I keep seeing our matters, the way they get handled most of the times, out of 100 instances 95 instances I don't get the sense there is any understanding of time value of money. I am not blaming them, it is something that alien to them. So, it is advocacy, it is understanding building, you have judicial academies and what not.Shroff: We need a corporate finance training course for them.Q: Since you said that it is too rigid, is there something that should be changed in the JLF process itself, up to the 90th day do we need to change the way banks approach a stressed asset?Rao: The main difference between JLF and CDR, if we really look at it, all the lenders which are participating in the JLF, they are not bound to take the calls because again two types of JLF we are seeing. One, where all the lenders will sign the agreement before start of JLF, secondly they don’t sign. Why they don’t sign I don’t understand but there are cases where all the lenders are not signing, lot of discussions will happen, some of the lenders are not agreeing.Q: But now the rules say that 51 percent of the lenders and 65 percent by value is enough. Is that helping?Bansal: It is helping because this was changed only for the number perspective because sometimes what happens, the number percentage were 60 and there are many lenders giving Rs 5 crore loan. You see the latest February guideline of RBI, it is very clear, somebody who has agreed doesn’t sign or doesn’t implement, there is an accelerated provision for that.Shah: I just wanted to add a final word on SDR. I think the threat of SDR is a lot more powerful than the actual implementation of SDR because a lot of promoters don’t want to lose the asset, they don’t want to be thrown out. So, it is a good threat to arm-twist the promoter into restructuring, bring in more equity.Bansal: I wanted to add one point to what Rashesh Shah is saying, I think banks or even industrialists borrowers are still not fully aware, when RBI introduced SDR, there is one clause which I think people are slightly forgetting. RBI says, in all the future loans now you should have this clause I think which people have still not wake up to that reality. Even bankers have not woken up to that reality that they have to do it.Q: Give me an idea whether the resolution of assets will be a little better off three years from now, how much 20 percent will be resolved you think?Bansal: My feeling is 80percent will get resolved, resolved means either banks have to take some haircut here and there, maybe 10-20 percent you may have to write-off.Q: Have we troughed out?Mahapatra: When RBI says that banks you have time up to March 17 to recognise bad loans that means banks still have time to recognise bad loans, that means there are so many bad loans which are still hidden. The AQR of RBI is targeted big value loans, so some of them are 150-120 crore, I don’t know the exact number, some of them have come to light, so banks have been forced to make provision and all that. There are many cases which are below the cut-off limit, which are still under the carpet and second point CDR was one institutional framework in which loans were restructured. Apart from that banks themselves restructured departmentally many loans which would not know what are the health of those loans, so I am not very optimistic, as a regulator, ex-regulator, I am always pessimistic that probably we haven’t seen the end for tunnel, we still have miles to go.Q: This is serious pessimism, Mr Shroff?Shroff: I am going to have a slightly different note. So, resolution of any problem always first begins with acceptance of the problem and the biggest change that we have seen is acceptance of the problem. Yes there is more work to be done because everything is sort of still not come out, but we have started the journey very seriously. Full marks to Dr Rajan for that for having initiated that process and now the genie is out of the bottle, there is no putting it back. So that being said, a lot of institutional steps are taken whether it’s the bankruptcy code, SDR, the whole cocktail of remedies that is there. It is going to work.Jayesh: I think in the last 12 months there has been significant changes in the mindset and the environment. Partially, thanks to may be the media glare etc., so it’s no longer that it’s okay to default and I can use the judicial process for 20 years and not to pay up. That itself changing and therefore there is clear disincentive makes a big difference. Given what we are seeing, the concern we have is let’s not completely let go of the pressure. Yes, shrillness needs to be softened, but at the same time pressure needs to be sustained. We are getting close to the dawn; let’s not now go to the sleep.Shah: The idea is to quantify this and put it in perspective then it becomes easy. I do believe that out of these Rs 800,000 crore, banks have provided for Rs 200,000-250,000 crore. Our estimates are another Rs 80,000-100,000 crore more has to be provided and which is not unaffordable because quite a few banks have, they will stakes in their insurance companies, asset management companies, raised additional capital through earnings also they will provide, so it is a 4-8 quarters cycle of providing. RBI did very well with AQR, which is a first step say that it’s an NPA. Now, we are going to the step two which is providing, banks can afford it without creating any systemic crisis, another Rs 80,000-100,000 crore is what is additionally to come, that will get provided in the next 4 quarters hopefully. Then the resolution and if economy comes back as you say in 2003-04, it was the economy came back, so hopefully if the economy comes back a lot of this will be clout back also. So we are the beginning of an end of the NPA cycle. I do believe 4 quarters from now, we will stop talking about NPAs and we will start talking about how to get credit growth back in the economy.