Tackling NPAs: The New Strategy

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• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

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• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

In News: Independent asset management companies and steering committees will be set up for faster resolution of bad loans in the banking system. The Government has accepted a five-pronged plan of the Sunil Mehta-panel.

What has caused distress in the banks’ assets and have played part in the mounting NPAs?

• Prolonged downturn in the world economy,
• Falling commodity prices,
• Lack of due diligence and adherence to rules (inadequate and poor risk assessment of the proposals by the banks)
• Complex workings of the bureaucracy,
• Typical bureaucratic red tape,
• Long delays and gestation periods of several infrastructure projects,
• Delays in land acquisition and
• Politically inspired agitations

Sunil Mehta-panel:

Objectives:

• To ensure the operational turnaround of the banks and stressed companies so that the asset value is retained
• Bring in credible long-term external capital to limit the burden on the domestic banking sector while ensuring robust governance and credit architecture to prevent a similar build-up of non-performing loans in the future

5-point formula to resolve NPAs in the banking system – Project Sashakt

• An independent asset management company (AMC) and alternative investment fund-led resolution approach to deal with NPA cases of more than Rs 500 crore
• An asset trading platform for both performing and non-performing assets
• A plan for also dealing with bad loans up to Rs 50 crore – for very small loans, banks will set up verticals and departments to deal specifically on a template basis like the deadlines, the timeframe for it to be resolved in 60 days, and the resolution will be carried out on a basis which will be defined. Banks will have to follow a predefined manner of putting forth resolution plans and work with people with specialisations to deal with it.
• For loans between ₹50 crore and ₹500 crore, the committee called for a bank-led resolution approach, with the resolution being achieved in 180 days. The resolution plan has to be approved by lenders holding at least 66 per cent of the debt
• For the resolution of SMEs, the committee suggested the setting up of a steering committee by banks for formulating and validating the schemes, with a provision for additional funds. Stating that the resolution should be complete within 90 days, the committee suggested that the resolution of these assets be under a single bank’s control, with the bank having the liberty to customise it.

Note:

• Disfavours the idea of setting up a “bad bank”
• The resolution route is also applicable to larger assets already before the National Company Law Tribunal (NCLT) and any other asset whose resolution is still pending.

Challenges in Implementation

• Operationalisation of the scheme requires a lot of homework at the bank level to evolve Standard Operating Procedures (SOPs) with action points and pin pointing granular timelines at each stage of the process.
• Internal capacity-building and training of teams
• Retaining the value of underlying assets and allay the sufferings of hapless small and medium entrepreneurs stuck with bad loans.
• Employment generation and protection of jobs
• No debt resolution is possible without the cooperation of the borrower. Therefore, the borrower, once free from the delinquency, should be made eligible to avail of loans again with the banking system and not be barred from future borrowings.
• Education of borrowers and influencing them to keep channels of communication open so that the ‘Sashakt’ project transcends the whole banking industry in order to effectively mitigate the bad loan mess.

Conclusion:

• Legal recourse has to be minimised so as to arrest the tendency of wealthy promoters and interested parties running to the courts for anything and everything, paying their lawyers rather than the lenders.
• While creation of systemic controls in banks to improve asset quality is essential, it also calls for creation of sustained loan repayment culture. The borrowers should have fear in the minds against default and misuse of bank loans. The internal credit governance in banks must be supported by a good credit culture where lending and recovery becomes a seamless integrated function.
• To make the work of bankers easier, there should be a collectively approved mechanism with the cooperation of the government and the regulator.
• Need to be mindful of the 4 Rs —
  • ‘Recognition’ of assets close to their true value
  • ‘Recapitalisation’ or infusion of equity for banks to protect their capital
  • ‘Resolution’ in the form of selling underlying stressed assets
  • ‘Reform’, through the right future incentives for the private sector and corporates to ensure there is no repeat of the twin balance sheet syndrome.

Must Read: Link 1 + Link 2

Connecting the Dots:

1. What are Non-Performing Assets (NPA)? Why are they detrimental for the economy? Examine.
2. Which major sectors contribute the maximum to bad loans or NPAs in India? What is the way out? Analyse.