Resolution of Stressed Assets: Towards the Endgame – Understanding RBI Governor’s observations from speech delivered on August 19, 2017.
On August 19, 2017, Mr. Urjit Patel, Governor, RBI spoke on the inaugural session of the “National Conference on Insolvency and Bankruptcy: Changing Paradigm”, Mumbai, and emphatically mentioned the present precarious position of the Balance Sheet of the banks in India and the efforts of RBI, Ministry of Finance as well the banks themselves towards finding a resolution of the huge stressed assets of the banks. His speech appears in RBI website as per the given link. Those interested can read the original speech but to simplify the speech for an average reader, I have extensively quoted along with my observations. It is intended to understand the present financial position of the banks better.
“The gross NPA (GNPA) ratio of the banking system at 9.6 per cent and the stressed advances ratio at 12 per cent as of March 31, 2017, on the back of persistently high ratios in the past few years is, indeed, a matter of concern. 86.5 percent of the GNPAs are accounted for by large borrowers, i.e., borrowers with aggregate exposure of₹ 5 crores and above. The challenge in dealing with the issue gets accentuated when observed against the capital position of some of the banks, particularly public- sector ones.” (quoted from RBI Governor’s speech)
One can make the present bank managements responsible for their actions in requesting the Government of India to infuse the equity to move from one bad position to another without making efforts to recover the earlier outstanding loans. A visit to any nationalized bank branch would reveal the pathetic level of the Chief Manager who has been reduced to a virtually simple manager who runs the show without any efforts towards fulfilling his onerous responsibilities as a senior officer as he is called for, and also being allowed a fat salary, perquisites or other benefits which are quite high as compared to the private sector manager who has no security of his job even what to speak of other benefits. The public-sector bank managements together have to make serious efforts to identify the role of every one of their employees afresh by engaging the unions of both the officers and workman union. Simply following the old order which was evolved at the time of nationalization of banks is rudderless and would totally annihilate the existence of the banks. The private sector which entered the scene very late also needs to understand from their elder ones, namely, the public sector banks.
RBI Governor mentioned about various efforts recently taken towards strengthening the legal, regulatory, supervisory and institutional framework towards resolution of liquidating huge outstanding stressed assets or for a normal person, popularly known as huge loans.
Strengthening the legal framework:
Passing of Banking Regulation (Amendment) Ordinance
I have previously written a separate article on this specific topic in Tax Guru when RBI dealt with the huge loans outstanding with only a handful of big borrowers who had put the whole banking system to huge losses and provisioning. The bankers in turn failed to act for reasons known to all concerned. It looked as if the bankers did not want to act at all and wanted to witness the decay of the banks. Since no progress was made even after promulgation of the IBC, to strengthen the hands of RBI, the above ordinance was passed which enforced RBI to immediately order the sleeping banks (it is my version) to wake up and set up committees to take steps to find a resolution of huge stressed assets. Many banks have recently taken action to refer many accounts under IBC for final action.
Even identification of many accounts for action by banks by RBI has never been witnessed in the past since RBI nominees just kept quiet when the loans were sanctioned or released to non-qualified borrowers . It is expected that under IBC, the creditors (75% of them) would eventually arrive at a feasible resolution to avoid bankruptcy. A large number of accounts have been put under IBC and like the Western countries, a lot of progress is expected. It is presumed that the onus of success of reduction of stressed assets is not solely on the commercial banks but also on RBI which took a witness position in the past.
Follow up action by RBI and evolving regulatory framework
Quoting directly from the speech of RBI, the following para is reproduced:
“The continuing endeavor of the Reserve Bank has been to strengthen the supervisory and regulatory framework to ensure timely recognition and disclosure of incipient stress and to facilitate effective and meaningful resolution.
In particular, the decision to do away with the regulatory forbearance regarding asset classification on restructuring of loans and advances effective April, 2015, was a significant step from the perspective of aligning the regulatory norms with international best practices.
The Asset Quality Review (AQR) exercise undertaken in 2015-16 was a critical step in recognizing the aggregate stock of non-performing assets across the banking system – it was a form of “catch-up”. In tandem, a series of measures were put in place to provide a mechanism for coordinated resolution of stressed assets.
Further, additional tools to deal with problem assets were also introduced, in the absence of an effective resolution framework. These tools primarily facilitate optimal structuring of credit facilities, ability to change ownership/management, and help restructuring of stressed assets.
A framework was put in place for greater transparency in sale of stressed assets by banks with a view to ensuring the sale is at market determined prices.”
Understanding from a simpleton language, RBI governor conveys that:
Quoting again from RBI governor’s speech, we may proceed as under:
“During the Annual Financial Inspections (AFIs) of the banks, it is usually observed that there is a divergence between the NPAs and provisions declared by the banks and those assessed during the AFI process. This has adverse implications on timely recognition of actual risk, trustworthiness and transparency of books of accounts, management effectiveness, etc. Accordingly, in order to address this asymmetry, disclosure requirements have been put in place – banks have to disclose in their annual accounts the details of such divergences where these exceed specified thresholds.
The recent decision by SEBI that requires listed entities to disclose defaults on, inter alia, bank loans within one working day can make a huge difference in the credit culture. If my understanding is correct: effectively, a one-day default by bank debtors will result in all bank loans to the debtor entity being generally classified as ‘default’ by the rating agencies, with attendant implications for risk weights on such exposures and capital requirements by the banking system.”
Let us list below other measures that were taken by RBI as per the speech of its Governor:
How do these measures evaluate on a neutral scale of the effective loss which may be incurred by the lending banks, if IBC and other steps are taken to effect speedy recovery of their stressed assets?
RBI Governor expects the banks to have necessary “haircuts” as he calls them, to effect speedy recovery of their stressed assets without the fear of reaction from governmental agencies on bribery charges.
Various measures mentioned above, for a banker with 3 decades of experience, is nothing new. Banks are expected to get deposits, lend at suitable rates and help all stake holders. But consistent efforts by vested interests reduced the powers of honest officials to become mere witness to events than act on timely basis to recover the stressed assets. Can nationalized banks act like islands and work against themselves in recovering stressed assets?
Does one need RBI to work like a commercial bank to identify the accounts for timely action by commercial banks which work under the supervisory control of RBI? Can one believe that a recent report talked of non- reporting of required NPAs by private sector bank, so called darling of eminent writers from the western world who would invariably decry nationalized banks, until RBI conducted its inspection and found out the truth? One did not hear what action was taken against the so-called auditors of the bank who could have easily done its job unless it decided to favor the private sector bank.
As an experienced banker from an era when honesty was the first requirement to be selected as a banker, either as an employee or an officer, when even the union would be reluctant to support a corrupt or fraudulent employee or officer, it is my fervent desire that the steps taken by the RBI would improve the health of banks and the government would not be required to bail out the banks. Yes, meekly, as an investor, I do require the banks to adequately compensate me for investing my hard- earned money with them for nearly 3 decades though even SBI did not treat us well in the past. Right now, the banks would have to act or under IBC, if possible be handed over to new owners for bringing prosperity to all stake holders.
RBI Governor’s speech dated August 19, 2017 published in their web site, as per details given below: