NCLT is not the panacea for all bad loans, but with defaulting promoters being made to increasingly realise that they are not irreplaceable, the dedicated recovery framework should discourage cavalier risk-taking, forcing companies to deleverage and create sufficient reserves, State Bank of India (SBI) deputy managing director Sunil Srivastava tells Sangita Mehta in an interview.
Edited excerpts :
The central bank has put 10 banks under prompt corrective action due to a sharpBSE -5.00 % rise in bad loans. External factors may have had a role in the spiral, but where did the banking community get it wrong?
In retrospect, they were more credulous than they should have been. They believed in the sanctity of the approvals, linkages, contracts, the demand projections, the ability of the promoters and, most importantly, the continuity of the systems prevalent in the country. They accepted assumptions based on a continuity of the trends and did not factor regulatory, legal, administrative and economic disruptions.
Then the projections did not materialise. Rectification and restructuring ensued. Interest during construction (IDC) continued to mount, while accounts were maintained as standard by further capitalisation on the back of fond hopes of revival. Bankers sought forebearances and policy interventions… And then the regulators changed tack from rule-based to principlebased, and weaknesses in the system came to the fore in successive waves of tsunami.
In hindsight, what was the primary cause for the spiral?
In retrospect, in a majority of the cases, it has been the promoters’ inability to infuse equity that should have been used for course correction. Instead, the banks allowed further leveraging. Cut to NCLT and the last ordinance. What it shall principally correct is the capital structure of the stressed companies, with infusion of new capital.
What does this mean for erstwhile promoters?
The realisation that they are not irreplaceable shall weigh heavy to discourage cavalier risk taking, force them to deleverage, and create sufficient reserves to meet contingencies. It would lead to a revision in their business models with a greater appreciation of the underlying risks and result in better corporate governance. Also, the mentality that I cannot do anything and that it is the bank’s problem will change. Because, it is no longer the bank’s problem: Not only will you lose your assets, but you will also not even be in a position to bid.
How will the evalution criteria prepared by banks be deployed?
In a resolution plan, financial and operational creditors want the maximum amount of money in the shortest possible time, with the least amount of haircut. In the evaluation criteria, on the quantitative factor, we have a greater weightage to upfront cash payment of debt. On the qualitative factor, we don’t want to give a company to someone who has not proven himself in the past, or does not have the experience.
Will these criteria apply to those going to NCLT, or to others beyond its ambit?
I see a semblance of sanity coming to the system itself, which means people will realise much in advance that this is the problem they will face, and that they will not kick the can. Earlier, bankers were faced with two situations – either we don’t give temporary help, in which case he sells off some of the assets or brings money from wherever, or he fails in doing so. If bankers felt that it is a viable unit facing liquidity problems, they helped instead of allowing it to fail. Now that liquidity issue never sorted itself out. Going forward, this is not going to be the case. Promoters will realise that if they are NPA for one year, they will divest their own assets. So the balance has tilted in favour of creditors.
What are the learnings for a banker?
As for the bankers, they extended themselves in the past, even in matters beyond their realm, in trying to find solutions to problems faced by the promoters, essentially in their attempts to protect asset quality. This has, in the past, resulted sometimes in granting corporate loans for correcting liquidity positions in the fond hope of the situation being corrected. This, at times, has resulted in the bankers being accused of evergreening too.
In the future, how will lenders access new loan proposals?
Risk appreciation is expected to increase manifold and taking regulatory and statutory approvals for granted is no longer passe. Bankers are now eagerly looking forward to new investment proposals that would factor risks on the part of the sponsors. It would also lead to a reduction of the leverage and more skin in the game. It would also lead to redefining the credit participation and delivery systems in the country. One of the main reasons for such increased capitalisation is interest during construction – it is just like a taxi meter that continues to accrue even when there is no movement. For this delayed decision making, consortium members are also partly responsible. This, going forward, will surely be rationalised, with the factoring of counterparty risks by both lenders and borrowers.