Thursday, June 29, 2017

Obstinate NPAs refuse to leave

Dynamics of NPAs Defy Sensitivities
B. Yerram Raju*
Non-performing Assets (NPA) are a dynamic statistic moving from Rs. 2.50trn in 2013 by nearly four times in four years! Unless the patient cooperates the medicine never works in the sense that it has to be taken on time and in required dose. Here the doctor has been experimenting with the medicine and the patient is unwilling to take it.

Corporate Debt Restructuring measure suggested post 2008 crisis, corrective action plans, Joint Lenders’ forum, 5:25 scheme, strategic debt restructuring (SDR), Sustainable structuring of stressed assets (S4) Scheme have all proved a damp squib and now the regulator-led solution through amendment to the Banking Regulation Act to invoke the provisions of the Insolvency and Bankruptcy Code against the wilful defaulters is made to appear a surgical strike at bad debts.

Any credit decision is bounded by certain forecasts or predictions about future. It is unlikely that every such decision would end up as expected. Hence NPAs are inevitable in lending. But credit assessed for corporate entities requires a 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 in the corporate sector, hindsight and individual appraisal of the directors and promoters as also post disbursement monitoring appear to have taken a beating. Banks’ scrutiny lapses could not be drubbed as willful default for a forceful recovery.

The Banks, Government owning most of them, and the RBI have been in the know of the devil in detail. After the Development Banks have been wound up and universal banking came into being where banks started selling credit, mutual funds, insurance etc., and bank-participated rating institutions or their semblance commenced 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 PSUs.

Bank executives eyeing for the top post or those that are in such high post wanting to hold to the chair compromised institutional interests.  The other reason for such credit for infrastructure, real estate, housing, and retail facilitated arm chair lending suiting their limitations in staff recruitment. They earned profits at the cost of efficiency with impunity. 
Bank Boards having the regulators’ and the GOI representatives as Directors liberally subscribed their signatures to the sanctions. 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 muted. Failures of governance are beyond action.

CDR mechanism helped greening the balance sheets of banks. The postponed debt obligations swooped on the banks after the CDR ended. Banks realized that they had to provide 30 percent of the secured portion and 100 percent of the unsecured for all the doubtful accounts. By the time the CDR ended Banks realized 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 Rs.2trillion.  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 other bank(s) 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 rarity. On top of this, banks started showing ‘vigilance’ from agencies like the CBI as villains. In most cases where such vigilance stumbled upon, many skeletons in the cupboard of such banks came out and some executive directors and chair persons were also 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 IBC requires thorough understanding of the art and science of negotiation and arbitration. Until all the stakeholders, advocates and the jury fully acquaint 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 easiest Sarfaesi Act and its rules in good measure.Recovery effort in most of the cases instead of ‘squeezing oil out of sand’ may be a milking cow for the errant.

It is time for the RBI to step out of the Bank Boards notwithstanding the losses that their planted directors by way of intangibles could be subject to. Regulatory arbitrage shall not take place to preserve the sanctity of central bank. In more than one way, dynamics of NPAs thus far defied sensitivities in resolution. Hopefully, RBI will be able to doctor a solution to the five-star hospital patient.