The government last week said it would speed up the process of resolving the bad loan or non-performing assets (NPA) issue that has been plaguing the banking sector for quite some time now.
However, there have been no details on what the mechanism would be to resolve this issue but hopes are alive and so the sector has been active in trade. Sources say the possibility of bad bank formation is unlikely.
To discuss this and the different mechanisms that could be used to resolve the issue CNBC-TV18 spoke to PK Gupta, MD, State Bank of India and Vinod Kathuria, ED, Union Bank of India.
More than speculating on what the exact mechanism would be it is the important to find a resolution for bad loans whatever the mechanism, said Gupta. It looks like the government and the RBI are working closely to solve this issue and will come out with a solution soon enough, he added.
It is imperative that government focuses on large stressed assets. He said, “There are some large accounts where the cash flow at the moment are not adequate to take care of servicing the interest and the principle. So to resolve them some kind of haircuts would have to be taken by banks.”
However to provide for haircuts, banks will need capital to make provisions, said Gupta.
According to Kathuria, the RBI is likely to play a larger role in monitoring willful defaulters. It will play the role of a facilitator. Also, the RBI may be allowed to accept extent of haircuts by banks where Joint Liability Forum (JLF) failed to decide the extent of haircuts, he added.
There is a possibility of more oversight panels and restructuring of JLFs, said Kathuria.
Below is the verbatim transcript of the interview.
Sonia: We understand according to our sources that the possibility of a bad bank formation has also been dropped. What do you think could be in the government's arsenal to solve the stressed non-performing asset (NPA) issue?
Gupta: I think it is important to look at the resolution of some of the large accounts that are facing stress. I do not think it matters whether it is done by the mechanism of a bad bank or any other mechanism. The finance ministry has recently said that there are enough mechanisms that are available which can be tweaked a bit to find out a solution to the problem that the banks are facing.
However, as the finance minister said the talks are at very advance stage probably between the ministry and the Reserve Bank of India (RBI) and something is expected soon. So, let us see what the government announces and see whether it takes care of the interest that the bank have in resolving this mess. Ultimately the issue is that there are some large accounts where probably the cash flows at the moment are not adequate to take care of the servicing of interest and the principal. Therefore, to resolve them some kind of haircut would have to be taken by the bank. So, what is required is - one, the process that the banks follow to ensure that there are no questions later on about the process that has been followed and second, haircuts that the banks may have to take. Obviously, the banks will have to provide for that and for that they will need capital whether there can be some dispensation where this provisioning happens over a period of time or in case the provisioning has to be made upfront then some of the banks would need some capital. I think these are the essential issues regarding resolving the NPA problems that the banks face right now.
Anuj: These are big issues because we saw in the past as well - the IDBI Bank issue is just about two-three months back. It is not that banks do not have provisions right now but right now nobody wants to move. So from hereon do you think there will be any timeline in which this issue will be sorted because the minister spoke about few hours or few days but do you get a sense that it could be that close?
Gupta: As far as the IDBI issue - ultimately the question is a process that the banks follow to arrive at the resolution plans. So as the resolution plans would involve some kind of haircuts for the banks, so the question is whether the process has been followed properly or not. However, for Scheme for Sustainable Structuring of Stressed Assets (S4A) the government did set up the oversize committee which looks essentially only at S4A issues. So now there are issues which are not resolved under the S4A, so they will require some deep structuring or some other kind of restructuring which is not covered by the S4A mechanism. So one of the indication that has come is that there could be more oversize committees or this oversize committee could have an enhanced framework where they can look at all kinds of restructurings that the banks are undertaking right now.
Sonia: We were speaking to a market expert from Ambit and he said that the need of the hour is to bring fresh equity into public sector undertaking (PSU) banks by raising funds through various other routes maybe through foreign investors, through sovereign funds etc that could solve at least a part of the issue as far as funding is concerned. What are your thoughts on this and what do you think could be the feasible options that the government has at the moment?
Kathuria: If we look back in February 2014, RBI took initiative and Joint Lenders' Forum (JLF) formed; special mention account and corrective action plan were formulated for quick resolution of stressed assets. In July 2014 the 5:25 scheme came but the cash flow estimate, in slow economy, became unrealistic. In February 2015 budget proposal was there for a formation of national investment in infrastructure fund to invest in distressed projects but nothing concrete has yet happened. In April 2015 the Reserve Bank of India (RBI) started asset quality review (AQR) and it accelerated the declaration of NPAs. In June 2015 the RBI introduced strategic debt restructuring (SDR) but it did not takeoff, not much progress is there. In June 2016 S4A was announced and now the government is considering in consultation with RBI to announce more proactive strategy in the current week where a role of RBI is expected to be more of engagement with the bank.
The RBI is expected to monitor the large wilful defaulter, says 50 to 100. Seventy percent big NPAs out of 6.8 lakh crore NPAs as on December 2016 belongs to the top 50, around 50 corporate. The RBI maybe allowed accepting the extent of haircut by banks where JLF fails to decide the extent of haircut. More oversized panels are likely to oversee for one time settlement (OTS) proposals of auctioning of assets by banks. However, restructuring of JLF may also be possible. The role of RBI is likely to be of a facilitator. The government and banks may initiate criminal action against large wilful defaulter and at the same time economic revival is also a prerequisite.
However, National Highways Authority of India (NHAI) in collaboration with ministry has revived several stalled projects by providing Gap Funding and then has a ceded priority charge to NHAI. The bad bank idea is also feasible. I do not know what the present status is.
Sonia: Have you had any discussions with the government on what the game plan could be and even if what the game plan is, is not clear, any timelines on when things could kick-start?
Gupta: There are a lot of discussions that continuously goes on between the banks and the ministry but ultimately what they announce, I do not think we are privy to that. The timelines, I think the finance minister announced in your programme where he talked about days, so hopefully it should happen soon.
Anuj: The finance minister did say to wait for a few days but should we assume that something would happen this week? The FM is in Mumbai, meeting bankers.
Gupta: I think the finance minister has said that something will happen, so let us wait for what they announce.
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