K Srinivasa Rao
The ordinance route to better manage asset quality reinforces the commitment of the government to tackle the perpetual bane of the banking sector. The pile of stressed assets has reached threatening proportions close to `10 trillion. Such unabated accumulation of stock of bad debts in banks built over last four to five years has begun to spread its toxicity. Low credit growth, loss of appetite of banks to lend, fear of more fresh loan accounts turning bad and continued stubbornness of delinquent borrowers to respond, choked Debt Recovery Tribunals (DRT) and so on. These trends over a period of time have also begun to not only hurt bank’s fragile profitability and capital base, but more glaringly has incapacitated some of the banks to lend.
The public sector banks (PSBs) with inherent systemic weaknesses which have diversified exposure have had to bear a larger brunt. Despite well calibrated regulatory measures prescribed by Reserve Bank of India (RBI), the outcome has not been consistent with the efforts. The closing stock of non-performing assets (NPAs) continues to be far more than the opening level during the last few years. This is despite many banks writing off larger chunk of bad debts either fully or partially.
Among many ostensible reasons, the crux of the problem is the short-term of leadership in banks in critical functions. As a result, many a times, the leadership team tackling NPA resolution is different from those who took credit decisions in the past. As a result, there is always a sense of detachment in dealing with the delinquent borrowers. The approach of banks therefore focuses on compliance to regulatory measures such as Joint Lenders’ Forum (JLF) that assumes more significance than the negotiations and outcome.
Moreover, while RBI issues guidance on how to tackle NPAs at their formative stage, banks don’t even have an institutionalised process to train its people to negotiate and strike a deal and persuade the borrowers to a conclusive stage. In the chain of actions, there is always a stalemate at some stage that retards the debt resolution process. Moreover, banks tend to be under pressure not to accept higher haircut resulting in prolonged negotiations, which often end without concrete results.
The sacrifice involved in the haircut has a few broad limitations: (i) The decision may be subject to investigations/probe by external agencies attributing motives behind the decision that can block the career path of enterprising executives in banks. (ii) The fear that banks do not have legroom to take hit of such large hair cuts in their profit and loss accounts. (iii) Internal process of staff accountability may also hold decision makers responsible for high haircut. (iv) The realisable value of underlying securities in distress situations is always far less than the value accepted at the time of originating credit that exposes the decision of haircut to scrutiny.
Given such continuing debilitating experience, RBI and the finance ministry has rightly diagnosed the menace. The ordinance route adopted to amend the Banking Regulation Act to provide greater powers to RBI will have demonstrative impact on the minds of entrepreneurs. The existing good borrowers will, in future, consider honouring debt contracts. Or else, RBI may direct banks to go for debt resolution process that may end the life span of enterprises.
It is a pragmatic move to empower the central bank to bring all banks and delinquent borrowers in alignment, within the timelines for speeding up debt resolution process, without allowing delay tactics to dither the process. A quick resolution will now be targeted at large borrowers defined as debtors to whom lenders have exposure of at least `5 crore. According to RBI data such large borrowers form 56% of bank debt and 88% of their NPAs. Even if 40-50 corporate sector borrowers are targeted, banks can bring down NPAs substantially by the end of the current fiscal. Now, the common limitations against accepting large-scale sacrifice are effectively allayed.
But the moot point still remains to be addressed. The result of new empowerment of RBI will create a pool of large sum of accumulated sacrifice/haircut out of the toxic portfolio of loans. The pool of haircut will be large enough, beyond ability of banks to absorb. RBI and the government will have to find out ways and means to fund such sacrifice. It can activate state-owned Asset Reconstruction Companies (ARCs) to buy the contaminated assets and gradually realise them. It will be a big challenge for the central bank to find out methods to absorb the difference between amount of loan outstanding as NPAs and amount recovered by banks. In many cases, the JLF may decide to restructure the loan to revive the unit. It again may tantamount to postponement of the inevitable, unless the unit is capable to generate cash flows enough to service the loans over a period of time.
Analysed from all angles within which banks are operating, flogging of banks by the central bank to act may lead to shifting of ‘stock of NPAs’ to ‘stock of haircut’ meant to be funded by an external agency by whichever name it may be called. The whole ecosystem of management of asset quality again comes back to square one as to who will foot the bill as far as existing stock of bad loans are concerned.
But the current set of policy initiatives signals the seriousness attached to servicing of loans for the future. The tendency of slippage of loans will substantially slow down. Borrowers will become more serious in repayments. Armed by RBI, banks will gather more courage to be stubborn with the delinquent borrowers. The employees managing loan portfolios will have to implement follow-up and monitoring system with clear time lines. Breach of time lines in actions may invite internal penalties. It will, thus, check autonomy of banks to prolong the settlement turning it into a perpetual NPA. Hence, it will empower banks in effectively managing asset quality in future but dealing with past stock will call for a more collaborative action from other key stakeholders.
On the whole, the tectonic shift of the government and RBI in launching a crusade against asset quality woes is certain to bring relief to banks. Borrowers will have to reprioritise servicing of loans to stay in business. Thus, it is time for NPA borrowers to pay or perish.