Non-performing assets (NPAs) has become a bad word in the world of finance especially for India where there are extreme sentiments on both sides. The lack of action ignites criticism of the highest order and the Reserve Bank of India (RBI) is invariably the subject of discussion. When there are stringent measures taken to resolve the issue which sounds practical, there is the same level of umbrage as the 12 February circular which spoke of resolution within 180 days spurred. Is there a way out?
There are two sides to the story. From the point of view of the RBI there has to be stern action taken by banks in ensuring that borrowers repay the money. This was made clear when Raghuram Rajan took over as governor where he highlighted that promoters cannot just take money from banks and walk away. There has to be accountability. The sequence is that the moment there is one day of delayed payment, there has to be a conversation between the borrower and lender which should lead to a resolution within 180 days or else it goes to the National Company Law Tribunal (NCLT) and the process is streamlined. For this purpose, all such accounts would go as Special mention accounts in three categories-- SMA 0, SMA 1 and SMA 2 accounts with different ranges of over dues. Resolution plans have to be drawn up and approved subsequently. Now if such talks do not result in a resolution within 180 days, there would be a direct transfer to the Insolvency and Bankruptcy Code (IBC).
This makes sense as we avoid kicking the can and creating excuses along the way. It must be remembered that all the measures used for NPA resolution in the past which includes SARFAESI, CDR, SDR, S4A etc., were all schemes which tried to have a resolution system in place. They did not work as agreements were seldom reached between the borrower and lender as the lender wanted the highest realisation while borrowers wanted the highest haircut. When they did not deliver, the IBC became the last resort. Now that IBC hurts, because there are haircuts (which should have been worked out between the two players ideally before the endpoint of IBC was reached) that could go either way depending on the asset, both the parties seem to be unhappy.
The other side of the story is on the borrowers’ side. Normally, these cases tend to be concentrated in areas like power, telecom, metals where there have been a series of adverse circumstances starting from 2013-14 onwards where irregularities, policies, global environment, funding, etc., made projects unviable. These are extraordinary circumstances which have affected the companies’ ability to repay loans; and while there could be malfeasance in some cases, it cannot be a generalisation. If such a harsh rule were to be applied to all the defaulters, then it would come in the way of future investment as there would be a very conservative view taken in these sectors. And given the critical nature of these sectors, it would come in the way of future growth. Therefore, there should be forbearance here. There is merit in this argument.
Given these two points of view, it is always going to be difficult to pitch for one of the sides. The fact remains that the NPA issue has ballooned over the years and even today one is not sure if all of them have been recognized and provided for. Every quarter witnesses the tumbling of more NPAs from the past and the prognosis is that we have to wait for one more quarter before taking a call on whether the worst is over. Deferring the issue over time has led to this crisis-like situation which has put all banks – especially PSBs in a tight corner. This is so as the issue of NPAs has impinged on the profitability and viability of some banks and the pressure on capitalization of banks.
The government being the owner of the PSBs has been grappling with the issue as it goes back to the budget where funding has to be provided. And given that there is public accountability for all such expenditures, the resolution process has to be in place. Therefore, on balance, the tilt would be towards the RBI where the 12 February circular has made everyone cognizant of the problem and instilled a feeling of urgency.
The point for discussion now is whether or not there can be a compromise solution where both the views get their say. One way out is to have this rule in place for all new loans given post-1 March where both the parties are aware of this process when they get into a loan agreement. This would mean that the entire stocks of NPAs that have built up are left out as the retrospective clause is removed. This also does not sound right as it would mean going back on our resolve to address this issue. An alternative would be to sieve through them and have an independent body decide which cases can be exempted. But then, again there would be some degree of discretion being used. The other way round is to extend the timelines for referral to the IBC. But this may again mean displaying signs of weakness which may not be desirable.
Some of the cases in the power sector have already gone to court to stall such moves by the RBI. The central bank has stood by its resolution which is a very positive sign as it does appear that the central bank believes that the days of compromise are over and have not quite worked. Maybe the courts adjudicate and have the final word. As the deadline has been reached, the corporate world will be watchful of prospective action from the RBI.
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Updated Date: Aug 27, 2018 13:15:18 IST