For an economy that is considered to be the brightest spot on the global platform, a major area of concern is high level of non-performing assets [NPAs] of banks especially public sector banks [PSBs].
As on December 31, 2016, gross NPAs of PSBs were Rs 606,000 crores of which Rs 100,000 crores were added during April-December 2016. For private sector banks, as on December 31, 2016, gross NPAs were Rs 70,321 crore of which about Rs 22,000 crores were added during April-December 2016.
Total stressed assets, which comprise gross NPAs as well as restructured standard advances [a euphemism for NPAs given a lease of life by relaxing the terms of payment such as extending repayment tenure, lowering interest rate, conversion of debt in to equity etc] were Rs 964,000 crore as on December 31, 2016.
For the last 2 years, PSB managements, Reserve Bank of India [RBI] – the regulator/supervisor of banks – the finance ministry and the newly created Banks Board Bureau [BBB] have been burning their mid-night oil to find a lasting solution to the problem but, so far, their efforts have met with disappointment.
A loan turns non-performing if the project/activity for which it has been taken is unable to generate enough cash [after meeting all expenses concomitant to that project/activity] needed to pay it back along with interest liability within set time frame. This in turn, happens (i) if underlying economic circumstances turn adverse e.g. projected demand not materializing or raw material costs zoom rendering operations un-viable.
It can also happen (ii) if the borrower/promoter siphons off the borrowed funds instead of utilizing them for the project for which the request was considered, loan sanctioned and disbursed. The loan can also become NPA if the project falls flat because the license [that forms the foundation on which it rests] was obtained by dubious means and it gets cancelled e.g. coal mines, spectrum allocation.
While, a substantial chunk of bad loans belong to first category [due to economic slump during 3 years up to 2013-14], a good portion falls in the second category. The latter were given by banks without conducting due diligence and assessing viability of projects and may be seen as an outcome of favors extended by subsisting political establishment to certain business conglomerates.
There are three overarching reasons as to why credible action could not be taken against defaulters. First, under Banking Regulation Act [BRA], while nothing prevents RBI from intervening and approving decisions regarding NPAs/toxic assets by banks, there was no enabling provision. It did not have an explicit mandate to make PSBs do what is needed in specific cases.
Second, Joint Lenders Forum [JLF] who deal with loans given by a consortium of banks are hamstrung by extant guidelines. The decisions regarding a bad loan are binding on all lenders in a JLF, if they are approved by 75 per cent in terms of exposure or 60 per cent in terms of absolute numbers. In view of protracted disagreements among members, it was not possible to reach these thresholds; hence no decision!
Third, any resolution of the NPAs inevitably involves the concerned bank/banks taking some amount of hair-cut [it is impossible to ensure 100% recovery; if that were the case, the loan would not have turned NPA in the very first place]. But, CEOs/heads of PSB were reluctant to take decisions due to fear of facing scrutiny by investigating/probe agencies viz. Central Bureau of Investigation [CBI], IB [Intelligence Bureau] and Enforcement Directorate [ED].
On May 3, 2017, union cabinet approved promulgation of an ordinance to amend BRA to give RBI more powers to deal with NPAs/toxic assets. The amendments empower the regulator to order action against loan defaulters and defaulting companies under Bankruptcy Code which lays down precise timelines for winding up of companies and debt recovery. Under the Code, bank need not even have to wait for 90 days of default – otherwise required for a loan to be termed as NPA – and entire process has to be completed in 180 days.
The amendments also enable RBI to set up multiple oversight committees and give them more powers to deal with NPAs. They will
monitor progress of top 35-40 NPAs in value terms [these constitute 60 per cent of all NPAs]. They get enhanced mandate to help lenders with their decision-making, including by JLFs. They will decide on matters such as which bank will take how much ‘haircut’ and to intervene if JLF reaches a deadlock.
The guidelines concerning JLF have also been tweaked whereby once a simple majority of the banks in the consortium, based on their exposure to the bad loan, takes a decision, it will be binding on other banks who are part of the group. This will help remove the current logjam and speed up decision making process in the JLF.
The government has also mooted amendment to the Prevention of Corruption Act [PCA] to ensure that commercially viable decisions taken by banks are ring-fenced from any regulatory backlash. In other words, once the decisions are taken with full backing of oversight committees and RBI, the bank officials involved in the process will not be subject to any investigation.
With the above decisions, Modi has really caught the bull by horn. True to his governance style, he has taken all the right steps to address the bottlenecks that are coming in the way of making an assault on NPAs/toxic assets.
Two years ago, RBI had initiated an asset quality review [ARQs] of banks which resulted in bringing problem of NPAs to centre-stage and making it transparent. Now, by catapulting the apex bank in to a commanding position for resolving them, the government has done a creditable job. And, the real big shot which will propel speedy resolution is to shield bank top brass against any probe.
Putting icing on the cake, the government is also goading cash rich public sector undertakings [PSUs] say, Steel Authority of India [SAIL] to buy NPAs of their private counter-parts operating in the same sector. This will address the problem often faced of new promoter unwilling to come forward to buy stakes in ailing units.
In sum, the amendments [via ordinance route] can turn out to be a surgical strike on NPAs subject to opposition parties giving support to the government in passing relevant legislation.