Non-performing Assets (NPA) are a dynamic statistic, moving from Rs2.50 lakh crore in 2013 to nearly four times in four years!
The corporate debt restructuring (CDR) measures suggested after the 2008 crisis, corrective action plans, Joint Lenders’ Forum (JLF), 5:25 scheme, strategic debt restructuring (SDR), sustainable structuring of stressed assets (S4) have all proved a damp squib. Now the Reserve Bank of India (RBI)-led action, by amendment to the Banking Regulation Act to invoke the provisions of the Insolvency and Bankruptcy Code (IBC) against wilful defaulters, is made to appear as a surgical strike at bad debts.
Any credit decision is bounded by certain forecasts or predictions about the future. It is unlikely that every such decision would end up as expected. Hence, NPAs are inevitable in lending. However, credit assessment for corporate entities requires finesse. The promoters and directors should be put to the rigor of scrutiny.
Environment and economic risks should be part of enterprise risk assessment. When we look at the largesse in lending to the corporate sector, hindsight and individual appraisal of the directors and promoters as well as monitoring post-disbursement appear to have taken a beating.
The banks, the government owning most of them, and the RBI have been in the know of the problems. After development banks were wound up and universal banking came into being, when banks started selling credit, mutual funds and insurance, and bank-participated rating institutions began rating the companies, credit risk assessment has become farcical. Lenders are aware that they are lending short-term resources for long term investments prone to very high risk of losses. Banks say they were forced to lend to public sector undertakings (PSUs).
Bank executives eyeing for the top post or those in such high post keen to hold on to their positions, compromised institutional interests. The other reason for such credit for infrastructure, real estate, housing, and retail was arm chair lending, necessitated by staff shortage. They earned profits at the cost of efficiency.
Bank Boards, having government representatives as directors, liberally sanctioned loans. Risk management committees, audit committees of Boards, regular audits and inspection reports at annual intervals should have been the instruments of Board oversight mechanism. Unfortunately, all these would appear to have been muted.
The CDR mechanism helped in greening the balance sheets of banks. The postponed debt obligations returned with a vengeance to the banks after the CDR ended. Banks realised that they had to provide 30% of the secured portion and 100% of the unsecured for all the doubtful accounts. By the time the CDR ended, banks realised that the tangible securities have all vanished. To save the banks, RBI introduced SDR.
Under SDR, banks can convert 51% of debt into equity to be owned by them and also change the management. New investors could hardly be found, as the amount involved is over Rs2 lakh crore. Management changes could hardly be seen. In the consortium of bankers, another peculiarity noticeable was that while one bank declared the asset as standard asset, another bank declared it as doubtful, calling for action, due to the former finding ways to push the ghost of NPA under the carpet.
S4 can be termed a non-starter. Unanimity in restructuring effort proved a rarity. On top of this, banks started showing ‘vigilance’ from agencies like the Central Bureau of Investigation (CBI) as villains. Skeletons in the cupboard of such banks came out and some executive directors and chairpersons were exposed.
The latest RBI measure to invoke the IBC and also provide for deep haircuts without fear of the ‘vigilance’ bodies has to prove itself, as the Code requires thorough understanding of the art and science of negotiation and arbitration. Until all the stakeholders, advocates and the jury fully acquaint themselves with the terms used in the IBC, resolution through this process would be a long and difficult journey, given the fact that the banks have not been able to make use of the easier Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act).
It is time for the RBI to step out of the Bank Boards. Regulatory arbitrage shall not take place to preserve the sanctity of the central bank. In more than one way, dynamics of NPAs thus far have defied sensitivities in resolution. Hopefully, the RBI will be able to provide a remedy to the sick five-star hospital patient.
(Dr B Yerram Raju is a risk management specialist and a former senior executive of SBI.)