Global Economy is yet to regain the normal after the 2008 economic crisis. Banking system across the world was affected by the global melt down and the Non-Performing Assets (NPA) in many countries in the world witnessed a sharp rise from 2008. The economies across the world are still pursuing the path of recovery.
In the last few years, Indian Economy’s integration into the world economy intensified and 2008 crisis also had an impact on Indian Economy and its performance. This has affected the banks in both Public and Private Sectors. Since lending by Public Sector was more to the sensitive sectors, Public Sector’s NPA level was much higher than the norms.
To strengthen the banking system and to increase the transparency levels, RBI brought new rules on provisioning and the banks have to provide higher provisioning compared to the earlier norms. Adopting this new rule resulted in reclassification and higher provisioning by banks for Non-performing assets.
Considering the India’s high economic growth, the sectors affected will see an upturn in the coming years and will return to black. In India, many mechanisms are available for resolution of NPA’s and Government and RBI are bringing innovative approaches to resolve NPA’s from time to time.
One of the issues for faster resolution of NPA’s was the fear of future investigation on resolutions arrived with the borrowers. The other was the way the Joint Lender Forum meetings were held and the decision taken in these forums. This was a slow process and this resulted in funds being locked up and not earning any income for the Banks.
The Government’s decision to give powers to RBI to arrive at resolution in individual cases is an innovative solution. RBI also relaxed the conditions for decision making at the JLF meetings. The Advantages of RBI taking the lead are -
a)The time taken for resolution will come down
b) RBI has the information about all the borrowers in all the banks and it is easy to consolidate and arrive at a single view of a borrower’s total borrowings with credit history.
c) When JLF meetings takes place, there is an independent body looking at the issue brings a fresh perspective.
d) Being the Regulator, It will be easy for RBI to coordinate with other resolution bodies in India; use their expertise, ascertain their views and bring in a 360 degree approach to resolve the problem.
e) The decision will be a joint one, where even RBI will be involved. In case of large borrowers, RBI can take the opinion of the Government also. This will bring comfort to decision makers in banks and they can decisions on resolution without the fear of future investigations.
Doubts are being raised about the effectiveness of this mechanism and how the judiciary will look at this process. In any such situations, where NPAs are very high, faster resolution increases the chance of higher recovery. Any delay in resolution reduces the value of assets, increases the cost and keep the capital locked for a long time.
Since the purpose of the mechanism is to expedite the resolution and release funds into the system, RBI’s role will be a catalytic one and collective decision of all concerned should be looked at with very positive approach by all concerned.
In Indian banking system, most of the lending is asset backed and in many cases, the borrowers are having large land banks and assets and they can cover the principal. In many cases, it would be possible to even recover 90 percent outstanding, when companies are owning lot of assets. In 2000, China had a NPA which was very large and they were able to bring the NPA’s from 40 percent of lending to respectable level today.
Doubts are being raised about, who will be the buyers of the assets on Sale. The leading Cash rich companies in each sector, Sovereign Wealth Funds, Pension Funds, Foreign companies, Foreign Investors, NRI’s are all waiting for opportunity to invest in India. Considering that India will grow at more than 7 percent every year, in the next few years and the likely increase in GDP growth on account of demonetisation and GST, investors are very bullish in India. The high GDP growth itself will aid in reducing the NPA.
Most of the Indian banks now focus on Retail customers, where the scope for large NPA’s is limited. Further the development of Indian Bond market and introduction of INVITs and REIT’s is going to help in reducing the future NPA. Most of the sensitive sectors, will use other funding channels / new financial instruments for executing their projects in future. Through further capitalisation of banks and higher growth in Banking, the NPAs will be back to normal level in two to three years.Author is Head Corporate Performance Management at Hinduja Group