Life is getting tougher and tougher for India’s loan cheats. The Narendra Modi-government’s decision to seek the ordinance route to bar wilful defaulters from bidding ailing assets is a critical step in intensifying the battle against wily promoters. What this will do, in effect, is to shut out business houses such as Essar, Bhushan Steel, Bhushan Power and Steel, Monnet Ispat and Jaypee Infratech (facing insolvency /NPA proceedings), from bidding to their own assets on which loan has been defaulted to lenders. For those promoters, whose firms are NPAs to banks for a prolonged period (likely one year) too, will face disqualification in the bidding process.
Since the winter session of Parliament is likely to begin by mid-December, the promulgation of ordinance will likely happen before that. Once this happens, the chances of promoter interference when banks deal with troubled assets can be curtailed to a great extent.
Most bankers will tell you that this interference has been a major problem in such situations in the past. With this, the NPA battle carried out by the government and the Reserve Bank of India (RBI) is entering a more convincing phase. In June, the RBI has already passed its first list of 12 companies to banks to commence the bankruptcy proceedings. These companies accounted for a quarter of the gross NPAs of banks. Subsequently, a second list of companies too were referred to banks, according to (read here) RBI deputy governor, Viral Acharya. However, details of this list aren’t available.
The RBI’s all-out war against NPAs began in January 2015 when the central bank came with rules for early recognition of stressed assets in the banking system and punitive provisioning. Till then public sector banks (which accounts for 70 percent of the banking system and almost 90 percent of bank NPAs) were happily ever-greening bad loans of influential, politically connected promoters through technical adjustments. The infamous corporate-political nexus worked in full swing. The bad loans pile was built in the banking sector over a period of years during the boom time when banks engaged in careless lending to balloon their loan books and beat competition. There was very little care attached to prudential norms and quality of lending.
While successive UPA-governments were blissfully unaware of the problem, even the NDA-government under Narendra Modi woke up to the problem a tad late. The formulation of the Insolvency and Bankruptcy Code (IBC) was a turning point in the story. With the IBC getting more teeth, hopefully, the NPA resolution will pick up pace.
Right now, the NPA figures are alarming. As this Firstpost analysis points out, Indian banks' gross non-performing assets (NPAs) or bad loans stood at Rs 8.40 lakh crore as on 30 September, 2017. But, the final figure of stressed assets can easily double if one takes into account the chunk of restructured loan assets.
Without cleaning up the NPA table, the banking sector cannot be readied for any further reforms, including the sale of unviable banks to private parties. Hence, the move by the RBI and the government is in the right direction.
What will also work in the favour of the sector is that the government has finally acknowledged the problem of capital shortage of state-run banks by announcing a Rs 2.11 lakh crore capital infusion plan. If this works as planned, the banking sector will get a significant growth push.
While tightening the IBC framework is a key step, what is also required is keeping a tab on share price manipulations of stressed companies facing bankruptcy proceedings. Shares of such companies offer golden opportunities for speculators to manipulate and small shareholders get trapped as unintended victims. This is something experts have pointed out.
“Speculative movements in stock prices of companies undergoing resolution in the IBC could lead to distortion in efficient resolution, particularly where conversion of debt or infusion of equity is proposed, and therefore steps to monitor and regulate speculative price movements through appropriate mechanisms for a two to three month window till clarity on resolution emerges should be considered in the larger interest of all stakeholders,” said Manish Aggarwal, Partner and Head - Resolutions, Special Situations Group, KPMG, in a note.
The Modi-government has learned a hard lesson in the Kingfisher-Vijay Mallya episode. Mallya cleverly made all the 17-lenders who cumulatively lent Rs 9,000 crore (including accumulated interest amount) to the failed airline, as well as investigators and the government bakras by moving out of the country and dragging lenders and the government in a tough legal battle. The strengthening of the bankruptcy code will help banks avert similar cases. It is a long fight, though.
Published Date: Nov 23, 2017 12:24 pm | Updated Date: Nov 23, 2017 12:33 pm