RBI’s moves on resolving NPAs are welcome
With the absence of a bankruptcy code, a legal framework that is heavily skewed in favour of borrowers and inefficient Debt Recovery Tribunals (DRTs), it has been difficult for bankers to bring to book errant promoters; there are barely a handful of instances where banks have managed to recover their money in full. Meanwhile, given the stress on corporate cash-flows isn’t easing, a whole host of companies is becoming increasingly vulnerable to default.
RBI has rightly withdrawn forbearance for stressed assets but it has been sympathetic to the plight of banks, which, at times, are not even able to monetise the collateral; it recently allowed them to convert loans in a stressed company into equity at a fair price and own 51% in a company—a scheme referred to as Strategic Debt Restructuring. That way, the central bank made it easier for lenders to bring in new management into stressed companies. There haven’t been too many instances of banks having convinced promoters to allow them to convert the debt into equity—barely half a dozen—but that’s not surprising since most promoters in India are reluctant to give up control even if they are defaulters. Nevertheless, bankers have made a start.
Now, the central bank has gone a step further to make it easier for lenders to bring in new promoters saying they could classify a stressed asset as ‘standard’ even if the change in ownership took place outside of the purview of an SDR scheme. Classifying a loan as standard not only makes the balance sheet look cleaner, it also helps lenders save capital as they need to set aside smaller provisions for these. Once again, it is not going to be easy for banks to get promoters to give up their businesses—they will try every trick in the book to hold on—but it makes their task somewhat easier.
Indeed, at times, it is the banks themselves that aren’t able to resolve issues relating to bad loans and the action plan needed to put the account back on track. The joint lenders forum (JLF) mechanism, introduced so that banks could take quick action to salvage a loan on the verge of going bad, hasn’t worked as well as it should have. One reason for this was that the forum often comprised relatively junior officers and consequently, the boards of the banks were reluctant to take decisions based on their views. To try and remedy the situation, the central bank has now instructed banks to ensure that senior executives—no less than the rank of an executive director in a public sector bank—participate in an empowered group so that the boards of the banks feel more confident while taking decisions.
That should work better. Allowing incumbent lenders to exit in favour of a new one—without compelling the incoming bank to participate in the restructuring plan—is also a good idea. Banks must now make a concerted effort to dislodge errant managements though it is not going to be easy in the current environment where capacity is surplus and not many businessmen have cash to spare to be able to buy assets, even if at a discount.