The government’s initiative to resolve bad loans is going nowhere. Whether the National Companies Law Tribunal (NCLT) or other schemes, there is hardly any movement towards punishing the wilful defaulters or providing relief to companies whose businesses have gone under due to difficult market conditions. In the last four years, has there been a solution to the non-performing loans or assets piled up sky high with state-run banks? The answer is a resounding no. Procedural inadequacies apart, none in the banking industry, RBI or finance ministry would like to take upon themselves the responsibility of resolving these bad loans. The biggest apprehension is the lurking fear within the banking fraternity that ‘fingers may be pointed at’ for having resolved a big non-performing asset case and in the process taken a ‘hair cut’.
Hence, most banks have begun to reconcile themselves to making huge provisions out of their hard-earned profits as required under the law including proceedings of the NCLT. This is precisely the reason why the State Bank of India, bankers to every Indian including Mahatma Gandhi, has reported over Rs 2,416 crore in losses in the December 2017 quarter. Never in recent history has SBI reported losses. It’s not just the case with SBI alone. Bank after bank, reconciling bad loans in their books with higher provisioning has begun to happen as the Narendra Modi government is hell bent on the ‘great clean up’ act.
In a way, finance ministry mandarins may be right when they advise banks to explore other avenues before tossing a large NPA account into the NCLT. But then, the big question is: who will bell the cat? Though the recovery would be abysmally low, the banks would be trigger happy if it happens via the NCLT or through a court. No one is willing to take a call on classifying a case as a ‘business failure’ or ‘wilful default’ and get it resolved. Equally important is the fact that the Corporate Debt Restructuring (CDR) mechanism has not worked. The scheme for Sustainable Structuring of Stressed Assets (S4A) has not worked either. Roll over of debt by banks for some of the select top-notch borrowers was a big scam given the ‘sweetheart’ deals approach during the UPA’s two terms. In fact, that enhanced stress on the balance sheets of banks by the time Modi came to occupy centre-stage.
Recent experiences in strategic debt restructuring (SDR) seem to suggest that their failure was due to political interference in the banking system. Out-of-court settlements were not even attempted and the issues lingered on over the years to reach a tipping point. By and large, the banks have now been allowed to take strategic calls that involve negotiating skills and management expertise apart from cost, risk and benefit analysis inputs. The easiest and perhaps non-controversial option before bankers is to refer an NPA to NCLT whether the bank benefits from the process or not. Accordingly to one analysis, not even 10 per cent of outstanding loans could be recovered through the NCLT process in top 20 defaulters’ cases. If inefficacy of the NCLT process was pointed out, one is treated with disdain and catalogued as a ‘corporate agent’ trying to protect the interests of ‘defaulters’. Essentially, a delicate balance in approach is required.
Referring NPAs to the NCLT or initiating liquidation proceedings should be the last option for banks, RBI and finance ministry. The first option is exploring the possibility of revival, restructuring and refurbishing the company with or without the present promoters. Secondly, the government will have to initiate steps to take the fear out of bankers while taking commercial calls without political interference. This calls for a complete overhaul in the banks’ decision-making process and strengthen vigilance systems. It is here that independent directors play a key role as ombudsmen and investors’ representatives. Even if 50 per cent of NPA cases were to be resolved within or outside the NCLT, flexibility for negotiation and deal making is a must. For this to happen, the banking industry must be regarded as a key business sector with inherent risks. On the other hand, banks boards will get their powers only when they behave as responsible entities while resolving the Rs 8 lakh crore worth NPAs. “Zero tolerance” to corruption would be the key to cleaning up the Indian banking system that has turned moribund and unsustainable in the present form.