By Rajesh Narain Gupta
The NPA issue continues to nag the Indian banking system, with no respite in sight in the near future. Reports suggest that, in FY18, gross NPAs of commercial lenders grew by almost 50% to touch `9 trillion and it is poised to rise to 12.2% of aggregate bank credit by March 2019 from the previous year’s level of 11.6%, thus raising the spectre of spreading systemic risks.
Efforts are on to find an enduring solution for banking sector NPAs for quite some time now and, most recently, the Sunil Mehta Committee recommendationshas suggested a five-pronged strategy—called Project Sashakt—to launch a surgical strike on bad loans. The aim inter alia was to ensure operational turnaround of NPAs “in a manner that will create jobs and enhance the value of public sector banks” in sync with the landmark IBC framework.
The recommendations list five basic approaches towards resolving stressed assets in a time-bound manner. First, the SME resolution approach that is applicable to smaller assets with exposure of up to Rs 50 crore. Second, the Bank Led Resolution Approach (BLRA) that is applicable to mid-sized cases with exposure of above Rs 50 crore and up to Rs 500 crore. This is a pre-IBC process aimed at finding resolution within 180 days and requires financial institutions signing an Inter Creditor Agreement (ICA) to authorise the lead bank to implement a resolution plan within 180 days.
Third, the AMC/AIF led resolution process for large assets, with the exposure above Rs 500 crore with potential for turnaround. Fourth, the NCLT/IBC process for cases already pending before the resolution courts and not covered by other approaches detailed above. The last, the Asset Trading Platform approach which is applicable to both performing and non-performing assets.
No doubt, the report is quite holistic, and the Mehta committee has thought through various permutations and combinations to find short-term and long-term solutions to the NPA issue. However, for the suggestions to translate into meaningful actions, many challenges must first be surmounted. To begin with, the recommendations do not have the sanctity that a law carries. Hence, those banks that wish to challenge any action on the part of lead bank will have all the rights to do so, leading to protracted legal wrangles.
Further, retrospective applicability of the suggestions may be another challenge. Some of the private and foreign lenders are reluctant to participate in this approach since it may involve haircut, conversion of non-sustainable debt into equity or even sale of asset or the exit of promoters.
Besides, there are also the regular legal issues such as whether the operational turn-around requires exit of existing promoter and whether the guarantees and securities provided by the existing promoter should be released or not. This is because smaller banks may have the right to independent securities, and it is not legally right to deprive them of rights. Those banks whose debt is getting time-barred under the Law of Limitation will have to initiate the proceedings irrespective of the ICA to keep the claim alive under the law.
Now, the big question is whether to adopt a dynamic approach to find a solution to this big problem or sit quiet. Though the final call has to be taken by the lead bank, the steps suggested are still welcome. The government will be required to ensure that the decision-makers are given indemnity against any investigations, civil or criminal for having taken decisions to turn around the asset. The fear of being questioned or prosecuted at a later date that already haunts the banking sector needs to be addressed quickly. A single-window clearance may be required for resolution of policy issues in infrastructure sector. Clearances under the Competition Act may delay the resolution process as well.
Therefore, the express need is to have a calibrated approach for Project Sashakt to work, involving lenders and the government, that may lead to a lasting solution for the banks’ stressed balance-sheets.