Stressed assets are a major challenge to the banking industry, and are an aggregation of non-performing assets (NPA) and restructured loans.
Non-performing assets
NPAs are loans that borrowers have failed to pay — the interest or the principal sum — within 90 days of the due date of such payment.
A weak banking system, carrying above-acceptable levels of NPAs, is a major problem for the economy, the RBI and the banks. There have been a number of initiatives in the recent past to resolve this issue and strengthen the banking system. Strategic Debt Restructuring (SDR) and the Scheme for Sustainable Structuring of Stressed Assets (S4A) are instances. But their success in terms of a reduction in NPA levels is yet to be observed.
For example, the S4A scheme allows banks to convert a part of the defaulting company’s debt into equity and bring in capable investors who can turn the firm around from bankruptcy. The loans are bifurcated into sustainable and non-sustainable parts, so that the latter is converted to equity, while the former is left untouched, with present cash-flows being able to service such debt under the new management.
Although the banks would have to take on losses resulting from writing off a part of the loan, the overall debt becomes better secured under the management of a more responsible shareholder.
New amendments
In addition to these initiatives, the Banking Regulations Act 1949 has also been amended, bringing into effect the Banking Regulations (Amend) Bill 2017. This enactment is more aggressive and entrusts more power in the hands of the central government, the RBI and the banks to speed up the process of debt collection from defaulters and thereby reduce banks’ NPA levels.
Under this enactment, the Centre can authorise the RBI to direct banks to act against loan defaulters. The National Company Law Tribunal (NCLT) will then initiate proceedings under the Insolvency and Bankruptcy Code, 2016.
The problem
Stressed assets for PSBs are pegged at close to ₹10 lakh crore. This translates to over 15 per cent of the total loans and advances, while the same is pegged at around 5 per cent for the private banks. A large part of these stressed assets were not provided for. More importantly, it has come to the fore that the quantum of stressed assets has surpassed the combined net worth of banks, which is a cause for major concern.
Of the total stressed assets, around ₹7 lakh crore are NPAs. On one side, the Basel III norms require banks to become better capitalised, while on the other, the ballooning stressed assets negatively impact the capital base.
Although the problem is primarily a concern for the public sector banks, private banks — such as ICICI and Axis — are also showing signs of stress. Sector-wise, stressed assets are spread across infrastructure and construction, commodities (including iron and steel), power, telecom and real estate.
Recommending companies
In an effort to bring the situation under control, a panel has been constituted within the RBI to recommend defaulting companies against whom respective banks can initiate insolvency proceedings.
In the first stage, the panel has identified 12 defaulters that jointly account for 25 per cent of the total NPAs in value . The RBI has given directives to the banks to begin insolvency proceedings against these companies. It is reported that 500 companies have been identified and banks have been asked to initiate a resolution plan within the next six months.
Three companies — Bhushan Steel, Essar Steel and Electrosteel Steels — have been referred by the lender State Bank of India (SBI) to the NCLT to initiate insolvency proceedings. These three companies alone account for around 10 per cent of the overall stressed assets. Essar Steel, for example, has around ₹45,000 crore of debt since a couple of years now.
The NCLT has now appointed independent resolution professionals who will work with the companies to come up with a resolution to repay the outstanding loan within six months.
It is reported that at least 30 per cent of the debt can be assessed as unsustainable, and hence, may have to be converted to equity, thereby diluting the majority shareholders, the Ruias. But these are early days and the plan needs to progress, crossing many hurdles before a resolution is arrived at.
Employing delay tactics
On being referred to the NCLT for initiating insolvency proceedings, Essar Steel filed an application with the Gujarat High Court challenging the proceedings initiated by its banks, State Bank of India and Standard Chartered Bank, on the grounds that the RBI’s decision to choose Essar Steel as one of the candidates was arbitrary and that the company had been discriminated against.
The High Court stayed the proceedings, but later dismissed the same. It is possible that such delay tactics by other defaulters could slow down the process of addressing the stressed assets issue.
Pros and cons
Banks themselves find it very challenging to bring up the issue of defaulters, fearing investigations — they may have possibly delayed taking the required action on time. But this amendment brings in the RBI’s mandate and support to initiate action, relieving them of the responsibility. The Bill will now help the banks move forward on a much better footing to address the NPA issue.
It also offers a comfort factor, and RBI backing, for the banks in case they have to compromise with the lenders in the best interest of reducing NPAs. However, on the flip side, it is also possible that banks could take RBI’s intervention for granted and thereby dilute the quality of future lending. That can be damaging.
Taking both sides into account, it emerges that Banking Regulations (Amend) Bill 2017 is a positive development that will go on to strengthen the institutional base and address one of the most crucial issues challenging our banking system.