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.
