The Insolvency and Bankruptcy Code (IBC) has changed the equation in the lender-borrower relationship, with errant promoters now eager to resolve the bad debt mess at the earliest for fear of losing their companies, top bankers of the country said on Wednesday at the Business Standard Banking Round Table 2017, held in Mumbai.
State Bank of India (SBI) Chairman Rajnish Kumar, ICICI Bank Managing Director and Chief Executive Officer (MD & CEO) Chanda Kochhar, Union Bank of India MD &CEO Rajkiran Rai G, Standard Chartered Bank India CEO Zarin Daruwala, and former Reserve Bank of India (RBI) deputy governor K C Chakrabarty participated in a panel on ‘Banking — The Way Forward’.
“The balance of power has definitely changed (with the IBC). Earlier, balance of power was in favour of the banks till such time they had not given the money. Once the money was given, the balance of power was in the hand of the borrower,” said Kumar.
He was supported by fellow panelist Daruwala, who said discipline among borrowers is also undergoing a change after the introduction of the IBC.
“I clearly think that the balance of power is changing, also the sense of urgency is on the side of the promoters to (go for) a resolution quickly, lest they will be pushed to the NCLT (National Company Law Tribunal). It is also driving good resolutions. I think both from the sides of the bankers and the borrowers, it’s a good thing,” said Daruwala.
The IBC is also the biggest reform under the present government for the banking sector, and banks should not complain when the terms are tough.
Kumar said: “This was what the bankers were demanding constantly. So, pursuing the government to bring in an IBC, and (then) to say that we are not interested in that code now, I think is not right.”
In fact, in Japan, banks recover 90 cents to a dollar because of the Bankruptcy Act, whereas in India, the recovery rate is only 25 cents. The IBC should be able to change that, said Daruwala.
Bankers stressed that the need of the hour was to start working on the resolution of bad debts, estimated at above Rs 10 lakh crore already. The system could be already late in acting on this critical aspect. Kochhar said: “We are living in an economy where demand will keep going up because of our demographics and our growth. It is not really correct for us to just keep sitting on decisions and allow the projects to become unproductive. We are only debating about the recognition, we should act on resolutions, not even debate on resolution, but act on it.
Chakrabarty gave a different spin to the debate by stating that banks should not find problems somewhere else, but focus on repairing their books immediately on their own. “When you are in problem, don’t look into profit and loss account. First adjust the assets and liabilities. Your profit and loss has already been damaged, you may not able to save it; but first repair your assets and liabilities, profit and loss will come back. We do just (the) opposite,” Chakrabarty said. It is not a bankers’ job to worry about capital, but is the responsibility of the owner (government for PSBs) to put capital, the former RBI deputy governor said.
“We have to change the perception that a NPA borrower is not bad, identify the problem as quickly as possible and nourish him. The bank has to change the outlook. I think society has to recognise that we have to treat NPAs, we are not in an uncivilised society where if a person becomes sick, you throw him out,” Chakrabarty said.
He also mentioned a wide divergence in reporting bad debt in banks’ books, stating that despite all the information at disposal, banks might have done a less-than-honest job in recognising their stress.
The bankers, however, defended themselves, stating interpretation of the same laid down rule could be different for different parties. A note in point here was that India is only one of the few countries where non-repayment of dues within 90 days amounts to the asset being classified as non-performing. In most countries, it is left to the bank and the auditors to recognise if an asset is stressed, as long as the disclosure is full and transparent to shareholders. Standard Chartered Bank in India follows the international practice, Daruwala said.
“For every rule written, the interpretation depends on the situation, and what angle you are looking at. So, similarly, in the case of divergences, we all follow the rules, but these are mostly the projects under implementation,” said Rajkiran Rai, adding that 50-60 per cent of the stressed accounts come back to health “with some handholding”. But the tag of NPA makes it difficult for banks to lend further. The reason why credit growth is low in the system could be that the present growth is now led by the services sector, and not by manufacturing. Depressed commodity prices have reduced the need for working capital at a time when companies are deleveraging aggressively and not eager to take on new loans, said Kumar.
However, Kochhar maintained that companies did need money, and if disintermediation (other sources of funding) was added, the banking growth could be in the range of 12-12.5 per cent, against the banking system’s credit growth number of sub-10 per cent.
The bankers also assured that deposits were not threatened by the new Financial Resolution and Deposit Insurance Bill, as it was an improvement over the present system. Under the present system, deposits of up to Rs 1 lakh are protected. That continues to remain the same under the new Bill, while the regulator would always come in the way to protect depositors — like it has always been — whenever a bank is in a trouble. While bankers agreed the biggest challenge for now remained NPA and its resolution, the biggest opportunity was seen as coming from the micro, small and medium enterprises. And, this would be the space banks might target in the future for growth. The sector generates 40 per cent of the employment and would be the growth driver, bankers said. The banking industry also needs to change and adopt for an ecosystem that is rapidly moving on to the digital space, they said. #BSBankingRT Tweets