NPA resolution kicks into high gear, but banks still need somebody to foot the bill

Madhuchanda DeyMoneycontrol Research

There is very little doubt that India’s bad assets problem is crippling growth. As of December 2016, commercial banks had stressed assets (gross non-performing assets and restructured standard advances) worth Rs 9.64 lakh crore, with four-fifths of the burden falling on public sector banks, where the NPA ratio had touched almost 12 percent. As on December 31, 2016, aggregate NPAs accounted for Rs 6,97,409 crore — or 9.3% of their advances.

Yesterday’s press report suggests that government may be considering setting up a panel to handle the bad loan problem. While it is undoubtedly a welcome first step, the measures have to be bold enough to make a difference.

It may be worthwhile taking a look at the existing arsenals at the bank’s disposal, namely CDR (corporate debt restructuring), SDR (strategic debt restructuring) and S4A (Sustainable Structuring of Stressed Assets).

Existing Resolution Mechanism
The CDR system of restructuring corporate debt was introduced in 2001 as an institutional mechanism for restructuring corporate debt. Any loan exposure of Rs 10 crore and more and involving at least two lenders could have been tackled on this platform.

The scheme required approval of 75 percent of creditors by value and 60 percent by number. Lenders could provide additional finance, which could be treated as 'Standard' up to one year, post which if the asset did not qualify for up-gradation it would fall in the category of restructured debt.

Under CDR, banks were too concerned about attracting additional provisions, which led them to give two-year interest and principal moratorium to the companies seeking a financial restructuring. While this helped them to extend and pretend that the problem didn’t exist, it did little to help the company streamline its operations. This led to a high rate of failures in the CDR cell.

Under SDR a consortium of lenders could convert a part of their loan exposure in a stressed company into equity and own at least 51 percent of it. SDR was applicable for existing restructured accounts and needed the approval of a minimum of 75 percent of creditors by value and 60 percent of creditors by number. The banks were given a window of 18 months to bring the houses of stressed companies in order, but they found the time period too short to get any benefit out of it.

In February 2014, RBI allowed a change in management of companies that were not able to service bank loans as part of restructuring of stressed assets.

However, bankers spent months negotiating with promoters on possible restructuring options, using SDR as a scare tactic. This actually delayed the process of resolution as promoters would talk about bringing in new investors that would never materialise.

Then came Sustainable Structuring of Stressed Assets or S4A. The banks were allowed to convert up to half the loans of corporations into equity or equity-like securities. Any project which had commenced commercial operations and had an overall exposure of more than Rs 500 crore, including unpaid interest, could be brought to this platform, provided the bankers were convinced that the project could service the debt in the longer run. An independent techno-economic viability study could establish this. The banks would also work under the oversight of an external agency, ensuring transparency. This agency would protect the bankers from unwarranted scrutiny by the Central Vigilance Commission and the Central Bureau of Investigation.

S4A as a mechanism had a high entry barrier in its definition of sustainable debt. As companies had been in stress for more than three years, by the time S4A was introduced, it was difficult for companies to have a six-month cash flow that could justify the elevated level of debt.

What are the likely changes?
Recent communication from a senior government official hinted at tackling the large 30-40 accounts that form the bulk of stress assets for the system. It appears now that the government is working on tweaking some of the existing provisions to make existing resolution mechanism more effective.

For instance, instead of approval of 75 percent of creditors by value and 60 percent by number, the threshold could be brought down to a simple majority to enable JLFs (joint lenders forum) to take a faster decision.

Additionally, to empower bankers in state-owned banks even further, the Centre may finally bring in long-anticipated amendments to the Prevention of Corruption Act (PCA) in the Monsoon Session of Parliament. One of the ways to enable bankers to take decisions regarding haircuts on various stuck projects will require amendments to the PCA which will differentiate between decisions taken with mala-fide intent and those taken from a professional perspective.

With regards to furnishing guarantees by promoters, banks have asked that guarantees be sought only when there is a management change or a new promoter is taking over the debt-ridden company. This has become necessary as many promoters have refused to give their personal guarantee on loan restructuring, blaming the change in policies, cancellations of mines/spectrum by the courts for their companies becoming non-performing assets.

Banks have sought changes in existing debt recast norms including spreading provisioning of large accounts for eight quarters as large borrowers’ accounts involve large provisioning requirements. At present, the entire provisioning has to be made upfront.

What’s the key issue?

However, for the most viable of these options to take shape, the government has to first decide the extent of haircut that banks will have to take and who pays for the haircut - this is going to be a politically-sensitive decision. The assets are unlikely to find takers at book value and someone will have to fill the hole as banks are inadequately capitalised to take on the onus. Till this key question is answered, every move on this front will remain noise without impact.