Getting out of the NPA mess

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Updated: March 29, 2016 2:10:35 AM

Authorities need to tackle each case through appropriate root-cause analysis to ensure a fair and effective resolution

Although India’s GDP is estimated to grow by 7.6% in the current fiscal, manufacturing sector’s growth has remained fragile, owing to weak domestic demand and underutilised capacities. This year’s Union Budget lays a strong thrust on reviving rural demand and this could facilitate a pick-up in manufacturing capacities and production in the near future. However, the expansion in real economy will fructify only when it is supported by a robust financial sector, particularly the banking sector.

Over the last few years, the asset quality of banks has considerably deteriorated. Stressed advances ratio in the banking sector currently stands at 11.3% (September 2015), of which the ratio of gross NPAs and restructured standard advances is at 5.1% and 6.2%, respectively. The problem is largely concentrated in the five sectors of infrastructure, iron & steel, textiles, aviation and mining. These five sectors accounted for 51% of total stressed assets, with infrastructure alone accounting for about 30%.

The situation requires urgent remedial action. No wonder, both RBI and the government have placed this issue on their top priority. Over the last two years, RBI has taken various steps to address the NPA problem, including revamping of the 5:25 scheme and introduction of a Strategic Debt Restructuring (SDR) mechanism which enables all lenders to collectively take a 51% stake in companies that default after restructuring their loans.

The government, on its part, has announced the recapitalisation package for public sector banks. Recently, there have also been talks of consolidation of public sector banks and the passage of the Bankruptcy Code will facilitate speedier legal recourse against defaulting enterprises.

While these steps are noteworthy, they may not be adequate to restore the health of the banking sector in entirety.

The issue of stressed assets requires both remedial and preventive action. For a one-time quick resolution of stressed assets, Ficci has suggested creation of a specialised entity called the National Asset Management Company (NAMCO), which shall focus on rehabilitation of large-scale stressed assets, mainly in infrastructure sector.

Countries like Malaysia, Taiwan, Thailand and Korea had introduced a similar mechanism to address the issue of rising NPA during the times of financial crisis.

To make the SDR process more effective, a National Asset Management Advisory (NAMA) should be formed. Under this, once an SDR is invoked, the management of the company can be passed to NAMA, which can then put in place a professional board to carry forward the task of negotiations with promoters, requesting for approvals from shareholders, calling for bids from investors and bringing about managerial changes.

We have also suggested that the authorities need to tackle each case of NPA through appropriate root-cause analysis to ensure a fair and effective resolution. Stressed assets can be broadly grouped into three major categories, depending on the underlying contributing factor.
* The first category would comprise those cases which have been affected by cyclical or global factors outside
the control of company management; for example, sharp drop in commodity prices, rising imports (dumping)
from China;
* The second category would comprise cases wherein policy/procedural impediments over time have led to non-compliance;
* The third category would include cases where viability of operation has suffered owing to mismanagement on the part of the promoters or faulty decisions.

Each of the above categories of stressed assets has a different root cause and hence needs to be dealt with differently.

For the first category, banks could agree upon a restructuring plan. For the second category, an independent body headed by a retired Supreme Court judge can examine the issues in a transparent manner and draw out a revival plan for the project.

For the third category, promoters may be asked to bring in extra contribution by way of equity, failing
which the asset may be taken up for resolution through any of the available or new institutional mechanisms. Of course, we fully support that in case of ‘wilful defaulters’, strict action must be taken and that the law of the land should prevail.

Asset Reconstruction Companies (ARCs) can play an enabling role in effective management of NPAs and hence there is a need to strengthen them. The specific measures proposed in the Budget allowing sponsor of an ARC to hold up to 100% stake as well as providing complete pass-through of income tax to trusts of ARCs are noteworthy. Another area that requires attention is how to bridge price expectation gap between ARCs and banks. It is suggested that the Indian Banks’ Association in consultation with the Association of Asset Reconstruction Companies should draw a mutually-acceptable methodology for reserve price valuation under the aegis of RBI and the Department of Financial Services.

Addressing sector-specific policy-level issues is also essential to provide relief to projects impacted due to changes in the regulatory framework. In case of infrastructure sector, the government should fasten setting up of ‘3P India’ announced in 2014, to provide support to mainstreaming PPPs. The government also needs to ensure timely release of payments to the project developers and provide flexibility in PPP contracts including revision of contracts without attracting judicial action. The previous Budget did have some provisions to this effect.

Preventive measures too need to be well-incorporated in the overall banking operations to ensure financial stability. We have to improve in-house credit appraisal and project monitoring capacity of banks.

During project appraisal, banks should factor in contingency credit facility to enable the company to finance cost overruns/project delays due to unforeseen factors. Monitoring of the credit extended by banks should be strengthened and there should be a formal review of the credit processes by an independent external agency every two years. Another important preventive approach is to undertake a review of large NPA cases in the past and disseminate the learnings amongst bank boards, senior management and middle management.

The author is president, Federation of Indian Chambers of Commerce & Industry

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