The non-performing assets (NPA) of banks have been climbing year after year and had reached 11.6% of gross advances by the end of March 2018. This, according to the Financial Stability Report of RBI, would rise to 12.2 % of gross advances by March 2019. This average hides the very high levels of NPAs of public sector banks in general, and of a few in particular. For instance, the NPAs of IDBI, United Bank of India and Indian Overseas Bank are over 15 % percent of their gross advances.
Over the past few years, multiple efforts have been made to salvage the situation. Some of the steps taken were persuasive, others confiscatory. The Securitisation of Financial Assets and Enforcement of Securities Interest Act of 2002 was an example of the latter. Others such as the Corporate Debt Restructuring Scheme and the 5/25 scheme were based on the premise that stressed loans could be turned around with a little patience and forbearance. However, since these measures did not lead to the desired results, RBI, through a circular issued on February 12, 2018, which attracted considerable flak, ended all such conciliatory approaches. RBI was obviously of the view that those steps were only succeeding in postponing the inevitable and hiding the seriousness of the problem.
Meanwhile, the Insolvency and Bankruptcy Code (IBC) was put in place in December 2016 with strict time lines for corporate borrowers to either pay up their dues or risk losing their assets and companies either through the sale or liquidation of their assets. Latest reports indicate that this approach has been very successful with more than 850 cases being admitted to the insolvency resolution process (including 12 large accounts identified by RBI), of which about 140 have been resolved and another 200 are going in for liquidation voluntarily.
In early June 2018, the finance ministry set up a committee under the chairmanship of Sunil Mehta, the Chairman of Punjab National Bank. This Committee, which consisted of other public sector bankers, submitted its report a few days ago. The report has been accepted by the Centre with great alacrity. The Committee has suggested a layered approach to tackling NPAs. For those below `50 crore, the lender would set up a special unit within its ambit and deal with it within 90 days.
For NPAs between Rs 50 and 500 crore, the lead bank of the consortium will prepare a resolution plan in 180 days and if 66% of the lenders agree to the plan, it will be operationalised. If the lenders do not agree, then the case would be transferred to the National Company Law Tribunal (NCLT). For NPAs beyond Rs 500 crore, of which, according to the Committee, there are more than 200 with ‘bad’ assets of Rs 3.1 lakh crore, asset management companies would be set up, financed by alternative investment funds. The AMC will bid for the assets in an open auction and, thereby, stressed assets would shift from the balance sheets of banks to that of the AMCs.
At a glance, the recommendations appear to be progressive. However, a closer look throws up their severe shortcomings. For instance, banks are supposed to handle NPAs upto `50 crore on their own by setting up dedicated units themselves. The question is, if they could do it, why haven’t they done so? There was no bar to their adopting this approach earlier. Ditto for NPAs between `50 crore and `500 crore. The existing mechanisms for loan recovery do not preclude bankers from adopting the approach being suggested. In fact, the Joint Lenders Forum, the formation of which RBI pushed for in 2014, was very similar to what is now being suggested. If it did not deliver results in the last few years, what is the basis for presuming that it will succeed now?
For larger loans beyond Rs 500 crore, what is being suggested is very similar to the idea of a bad bank. although the Committee is careful in not using that term. All the drawbacks of the bad bank idea are present in this suggestion. The main criticism of the proposal relates to the source of funding. Why would any private institution, propelled by the principles of profit maximisation, fund such a venture? It would do so only if the assets can be picked up cheaply which implies a drastic haircut for the lenders. If the lenders are not averse to it, then why not continue with the procedure under the IBC?According to the Chairman of the Insolvency and Bankruptcy Board of India, the IBC has resulted in recoveries of `83,000 crore, covering about 2000 cases where the borrowers settled defaults as soon as they received a notice.
The Sunil Mehta Committee recommendations may lead to a lot of activity, but, it will be circular motion and will only succeed in diluting the processes under the Insolvency Code, leading to more delays. Was that the intention?
Ashok Jha, Former finance secretary to the GoI.
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