Inter-bank squabbles delay NPA resolution

There is discontent about larger banks striking bilateral deals with promoters of firms with stressed assets

While the Reserve Bank of India does not prohibit a bank from conducting bilateral dealings with a borrower, it doesn’t seem to have foreseen private deals struck outside the joint lenders’ forum. Photo: Aniruddha Chowdhury/Mint

Cracks in the joint lenders’ forum (JLF) experiment, aimed at timely resolution of stressed loans, are beginning to show and the picture isn’t pretty.

According to at least four people in the know, there is discontent among factions of lenders about larger banks in the forums striking bilateral deals with promoters of firms with stressed assets, making it difficult for JLFs to effectively implement a resolution or recovery procedure.

“In some large cases, larger banks have taken possession of land parcels or other fixed assets, reducing the outstanding debt of the company. This allows them to maintain a standard asset classification on the asset for some time,” said a senior official at a large public sector bank, the first of the four people quoted above. The banker spoke on condition of anonymity as discussions at JLFs are confidential.

These decisions are usually taken outside the JLF in direct discussions with borrowers, said the banker quoted above. What such deals end up doing is reducing the pressure that the JLF would put on an errant borrower and delaying the resolution process further.

Indian banks have gross bad loans of Rs.5.8 trillion, a number which bankers expect to rise.

“The JLF mechanism is a time-bound process; so, any delays in it will only hurt the bankers involved. We have issued a clear mandate that if any such bilateral dealings are discovered from now, they will be reported to the regulator immediately and action will be requested,” he added.

To be sure, the Reserve Bank of India (RBI) does not prohibit a bank from conducting bilateral dealings with a borrower.

In January 2014, the central bank issued norms that require banks to form a JLF as soon as an account delays repayment by over 60 days. The JLF will be organized by the lead lender in a consortium lending case and by the largest lender in cases with multiple lenders. The JLF is then required to come up with a corrective action plan within 30 days and a majority of the lenders are required to sign off on the plan within 30 days.

Delays in decision-making or implementation of the plan are met with accelerated provisioning on the case, according to the regulatory norms.

But RBI doesn’t seem to have foreseen private deals struck outside the JLF.

In April, private sector lender Axis Bank acquired control over Jaypee Group’s headquarters in Noida, in exchange for reducing debt. In the same month, IDBI Bank Ltd and State Bank of India (SBI) were also offered parcels of land to reduce the debt. At the beginning of the year, ICICI Bank, too, had taken over 275 acres from Jaiprakash Associates Ltd and reduced nearly Rs.1,800 crore worth of debt of the company.

Eventually, the promoter was forced to offer an option to other lenders as well to take over unencumbered land. The proposal is still under discussion and yet to be approved, the first person confirmed.

SBI, IDBI Bank, Axis Bank, ICICI Bank and a spokesperson from the Jaypee Group did not respond to e-mails seeking comment.

In the case of Bhushan Steel Ltd, according to a public sector banker who is the second of the people quoted above, most public sector banks had moved to classify the account as a non-performing asset (NPA) in April. However, some of the private sector banks continued with a standard asset classification on the account.

“Divergence in asset classification tends to work against any recovery measures as lenders won’t ever be on the same page. Besides, if a majority of the banks in the consortium have classified the account as NPA, it is unfair that others continue with it as standard,” the second person said.

While it is unclear why some banks continued with a standard asset classification in this case, a probable reason could be some short-term repayments which were received by them, added the second person.

Bhushan Steel has over 40 lenders, most of which are public sector banks. SBI and Punjab National Bank (PNB) are the lead lenders. Calls and text messages to spokesperson for PNB and Bhushan Steel remained unanswered till the time of going to press.

“Some smaller private banks and foreign banks who have small loan exposures in certain cases also break protocol and threaten to file winding-up petitions, even as the JLF process is going on. If lenders are quibbling among themselves, then you cannot force the borrower to do anything,” said the second person.

However, the blame for any delays in JLF proceedings does not just lie upon private sector or foreign lenders. According to a senior official at a large private sector bank, state-owned lenders often have an elaborate and rather slow decision-making process, which makes the JLF resolution very cumbersome.

“There have been cases where smaller state-owned lenders agreed to give additional working capital loans to a borrower and then never sanctioned it because the head office differs from what the banker at the JLF has agreed to. If the borrower cannot run daily operations, it would be unfair to expect them to pay back their dues,” the private sector banker said.

According to RBI’s financial stability report released last month, gross non-performing assets of banks rose to 7.6% of total advances in the March compared with 5.1% in September 2015. The top 100 borrowers accounted for nearly a fifth of these bad loans. A large number of these top borrowers have a JLF looking at possible solutions to ensure recovery.

“These differences among lenders point to the fact that probably the JLF system is not working to the extent that it was meant to. Bankers will have to sit together and resolve their differences themselves. It is likely that the deadlines that were talked about earlier will be stretched further,” said Saswata Guha, Fitch India Services Pvt. Ltd.

In December, RBI governor Raghuram Rajan said that banks would be required to clean up their balance sheets by 31 March 2017. This meant recognizing visibly stressed assets, providing for them and coming up with a resolution plan.

Hit by NPAs, PNB to focus on lending to better-rated firms

MD and CEO of the Punjab National Bank,
 Usha Ananthasubramanian

Impacted by asset quality woes, state-run Punjab National Bank today said it will focus on lending to better-rated corporates for credit growth.

"We are looking for highly rated accounts like AAAs and AAs, but it does not mean we will shy away from the B-rated accounts.

"However, the preference is always for the higher rated corporates," the bank's Managing Director and CEO Usha Ananthasubramanian told reporters here. 

She said even if income is going to be less from such accounts, there is stability in this segment as the capital charge is reduced. 

"We also encourage the B-rated companies because that rating does not mean they are bad. The only thing is that where the capital charge is more, we re-look and want them to be supported by collateral," Ananthasubramanian said. 

Although the bank gets proposals from sectors which are not performing well, it takes a conscious decision not to get into them, she said. 

"We do not want iron and steel but where we are already in, it is difficult to come out. Thermal power, gas-based power plants are some of the sticky areas. The old projects we have to continue and should support but we are not keen on incremental fresh exposure," she said when asked which sectors the bank is more cautious about. 

The bank had yesterday reported a 58 per cent decline in net profit to Rs 306 crore for April-June period on account of rising bad loans. 

Provision for NPAs jumped almost three-fold to Rs 3,620 crore from Rs 1,291 crore in the same period a year ago. GNPA ratio shot up to 13.75 per cent.
Speaking about recoveries, Ananthasubramanian said the 

bank is trying to recover non-performing loans which have turned bad. 

"How it improves our asset quality is a thing we have to see and one quarter will not decide it. So going forward, if you are able to control the slippages and improve the recoveries to outnumber the slippages, then it will reflect in the asset quality of the bank," she said. 

The bank has identified some bad loans to be sold to asset reconstruction companies (ARCs). 

"We have already lined up about 72 accounts which have been identified but it is not known how many of them will actually be put on sale," she said. 

The bank has enough security receipts (SRs) and is fine with the SR route as well, she added. 

"It is a misconception that the bank is always after full upfront cash purchases by ARCs," she said.

Asked whether bank has identified accounts under the scheme for sustainable structuring of stressed assets (S4A), Ananthasubramanian said the accounts are run by a consortium of lenders and not by one bank. So, most of the accounts where the bank would like to invoke S4A, there are other consortium lenders. 

She, however, said only completed projects which have commenced operations are eligible for S4A. 

"Unless they generate a positive earnings before interest, taxes, depreciation and amortisation (EBITDA), it will not be possible because the servicing of the loan starts the day you identify the sustainable debt and the unsustainable debt," she added.

NPA sales down to a trickle of just 2% of total bad loans

Notwithstanding rising bad loan problems in the system, sale of stressed assets to asset reconstruction companies (ARCs) in 2015-16 was only a trickle of the NPA mount at 2 per cent of the total of nearly Rs 5.8 trillion, which is down a whopping 20 per cent from previous year, says a report.

Notwithstanding rising bad loan problems in the system, sale of stressed assets to asset reconstruction companies (ARCs) in 2015-16 was only a trickle of the NPA mount at 2 per cent of the total of nearly Rs 5.8 trillion, which is down a whopping 20 per cent from previous year, says a report.

“The overall loans sold in FY2016 were lower by 20 per cent y-o-y and around 15 per cent of the overall loans in the banking system,” Kotak Institutional Equities said today in a report that is based on the analysis of 33 public and private banks.

The report did not offer any reasons for the massive dip in the sales, but it can be noted that banks are not happy with the cheap valuation that ARCs are offering while these companies are capital starved to make the higher upfront payments to the banks. The report also did not quantify the total amount of bad loans sold to ARCs.

As per RBI, total NPAS in the system jumped to 7.6 per cent in 2015-16, up from 4.6 per cent in the previous fiscal, which it warned could jump to a whopping 8.5 per cent by this fiscal end. The total stressed assets including NPAs stood at a staggering 13 per cent or over Rs 8 trillion in 2015-16.

State-run banks sold 75 per cent of their overall bad loans, lower than the 90 per cent of loans sold in 2014-15.

Axis Bank sold the largest quantity of loans but at a significant loss. The SBI Group, however, had the largest share of loans sold at 33 per cent of the overall loans compared to over 60 per cent in 2014-15.

Allahabad Bank and Central Bank were the two large public sector banks which sold a high share of their loans to ARCs last year.

NPAs: Need For A Holistic Approach To Resolution

The banks have been given time till March 31, 2017 by RBI to clean up their books while the gross non performing assets have reportedly ballooned to over Rs 5.5 lakh crore by end of March 2016

Banking system faces enormous challenges as the spectre of gargantuan non-performing assets (NPAs) is haunting them even as the regulator is coming out with new schemes to address the NPA menace head-on.

The banks have been given time till March 31, 2017 by RBI to clean up their books while the gross non performing assets have reportedly ballooned to over Rs 5.5 lakh crore by end of March 2016. This Herculean task needs to be addressed in a holistic manner, keeping the Indian ecosystem in mind, so as to minimise future slippages in the accounts. To begin with, it would be pertinent to recognise that all borrowers are not ‘chors’ and that all lenders cannot be accused of not having done the due diligence and then try to find a resolution before the problem starts eating into the very growth of economy.

Aggravating Factors
The list of factors that caused a jump of more than 475 per cent in NPAs in a matter of 5 years are many. However, factors like commodity cycle downturn, delays in approval from government be it environmental clearance, land acquisition process, obtaining right of way, forest clearance and lack of dispute redressal mechanism in a business-like manner, besides, policychanges like cancellation of telecom licences, withdrawal of coal and iron ore mines, dumping by some countries which made local products unviable, were other contributory factors which were further compounded by the indecisiveness of the decision makers who simply did not take any timely decisions fearing political backlash.

Just to elaborate this point further, let me draw on the steel sector. According to RBI’s Financial Stability Report, June 2015, five out of the top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors. And then the operational units in the steel sector lost their cost competitiveness. As is well-known, some of the critical factors affecting the competitiveness of this industry, particularly in economic downturn, include government’s support (tax incentives), tariff protection, raw material security at competitive prices and availability of infrastructure and logistics. Who would have seen this coming when the projects were set up.

Five Sectors-Demand Upside Holds The Key
It is interesting to note here that five sectors-iron and steel, infrastructure, EPC, mining and textile account for bulk of the reported NPAs which had their share of external factors responsible for accumulation of NPAs in the last 4-5 years. While wilful defaulters need to be dealt with strictly, it is also a fact that all these sectors play key role in the growth of the economy-both at the domestic level and in international trade. A robust revival of demand would enable the companies in these sectors to generate enough cash flows to not only service the debt but return to growth path in a short time.

RBI’s S4A Scheme-May Not Meet With Enough Success
During the last few years, the corporates have piled on an unmanageable mountain of debt without commensurate increase in the earning capacity. In this backdrop, the caveats attached relating to limiting the lenders from changing any of the terms of repayment and interest rate in respect of the sustainable debt portion as also the high level of equity dilution that could be expected with the implementation of the scheme, may lead to limited success and may not meet with the desired results.

Financial Health-palliative Care
As RBI Governor rightly put it, ‘band aid’ approach would not work over a long term. What is needed is a major surgery. While it is a good sign that banks are finally willing to acknowledge the problem, it does not mean that the issue is resolved. The real task begins only now. It is not DRT or CDR or SDR or S4A or Bankruptcy laws alone which can cure this malady. What we need is a macro view taken on the entire economy and then arrive at a resolution strategy which could unlock fair value from the distressed assets for the benefit of all stakeholders. 

The success of the above will to a great extent depend on pro-active measures taken in a co-ordinated manner by Govt. and the Regulator to quickly respond to the challenges being faced by the industry and ensure long term stability in policies which are critical to their well-being. To address the existing NPA problem and protect the economic value of their loan, it is imperative that banks go for a holistic resolution. It is the right time that pain is acknowledged, loan book is corrected, and assets are rightly priced and nurtured further by infusing new money for revival and operations by inviting a new promoter or special situation fund who can bring in their portion of equity or risk capital.

We all understand that without removing the extra flab of debt, the brides may not find any suitors. Further, the investors willing to take over stressed assets are well informed and fully aware of the inherent risks and challenges associated with reviving a distressed company without the support of the old promoters. The new promoter/investor will not be able to bring in the entire equity since Indian businesses cannot sustain superlative returns as they are not very competitive. Thus, it essentially means that the project/company would need to be supported mostly by the existing lenders who have access to cheaper funds in the form of low cost deposits and can manage risk of recovery in the hands of new management/special situation fund who have proven track record of success with higher credibility. When this happens as also with the bankruptcy laws coming in place, the business of investment in distressed assets will become more mature and there will be good interest among serious investors and business assets will be put back to use.

Unlike in other parts of the world, where business successes and failures are taken with equanimity and promoters do not mind shutting the business and moving on, Indians hate ‘failure’ and see failure as a stigma and leave no corner to project success. This die hard belief in making the venture successful and running might turn out to be a blessing in disguise in turning around the stressed assets and resolving the NPAs.

Bank NPA crisis: Here’s what is crucially missing

RBI Governor Raghuram Rajan will be remembered for his relentless pursuit of India’s monetary policy reforms, controlling inflation and advocating a stable policy framework. His precise diagnosis and direction for “deep surgery” for the chronic NPA problems of the banking sector, especially in public sector banks, is also noteworthy. He minced no words when he said that routine “band-aid” would not clean up the balance-sheet mess and put them back on a healthy trajectory.

RBI has been issuing master circulars from time to time, encompassing entire aspects of ensuring true and fair financial statements of banks. RBI has insisted that the new restructured loans, where the borrower has renegotiated the terms of repayment, must be classified as non-performing assets (NPA) from April 1, 2015, with provisioning of 15% of the outstanding instead of 5% for restructured loans, so that banks can take early recovery action or sell NPAs to asset restructuring companies (a loan turns into an NPA when interest repayments remain due on the 91st day).

Financial audit of banks are done by statutory central auditors (SCAs) and statutory branch auditors (SBAs). On the basis of prescribed eligibility criteria determined by RBI, the CAG prepares graded panel for empanelment and selection of eligible SCAs and the The Institute of Chartered Accountants of India (ICAI) prepares a panel for eligible SBAs in PSBs and send the panels for RBI’s scrutiny before finalisation of the lists. RBI has prescribed the number of SCAs and SCBs to be appointed to audit large, medium and small PSBs, and for audit of their branches.

Also Read: Banking crisis: Why promoters must be removed quickly

The government had delegated selection and appointment of SCAs and SCBs to individual PSBs from 2014-15 from the eligible list of firms, giving enough freedom to choose the auditors of their liking. Banks are free to select statutory auditors from the list with the approval of the Audit Committee of Board (ACB). The selection of audit firms as SCAs and SBAs is subject to RBI approval. The independence of auditors/audit firms is ensured by appointments of SCAs for a continuous period of three years, subject to satisfying the eligibility norms by the firms each year; PSBs cannot remove audit firms during the above period without the prior approval of RBI.

The option to consider whether concurrent audit should be done by bank’s own staff or external auditors is left to the discretion of individual banks. A critical issue is that auditors should be experienced, well-trained and, most importantly, adhere to applicable accounting and auditing standards, mandatory guidelines and the ethical code of conduct. Auditors must be able to function independently with professional autonomy and judgement. Adequate facilities and the requisite records must be made available to auditors with initial and periodical familiarisation of the process. Relevant internal guidelines or circulars or important references including the circulars issued by RBI and/or Sebi and other regulating bodies must be made available to the concurrent auditors.

Remuneration of auditors may be fixed by banks following the broad guidelines framed by the ACB, taking into account coverage of areas, quality of work expected, number of people required for the job, number of hours to be spent on the job, etc. Banks may devise a proper reporting system and periodicity of various check-list items as per risk assessment. Serious irregularities pointed out by the audit should be straight away reported to the controlling offices or head offices for immediate action. The findings of the concurrent audit must be placed before the ACB. An annual appraisal or report of the audit system should also be placed before the ACB.

Whenever fraudulent transactions are detected, they should immediately be reported to the inspection and audit department, and the chief vigilance officer and controlling officers. Follow-up action on the concurrent audit reports must be done promptly by the controlling office and inspection and audit department. When RBI has been insisting on true and fair financial statements by banks through various notifications, master circulars, guidelines and directions time and again, why has the banking sector, especially PSBs, been pursuing window dressing so consistently for years till the position reached the current imbroglio? Statutory auditors finally certify the accounts true and fair. Whenever any falsification of accounts on the part of the borrowers is observed by the banks or financial institutions, the auditors are responsible to bring it to the notice of the management. Auditors must have to follow auditing standards, applicable accounting standards, rules and the professional code of ethics. Being the regulator of chartered accountants, ICAI is duty bound to fix accountability of auditors if they are found lacking in professionalism and ethics.

There should be disciplinary action by ICAI. In fact, ICAI, RBI, the Department of Banking Supervision and Indian Banks’ Association are mandated to circulate the names of guilty chartered accountant firms. RBI is required to share such information with other financial sector regulators, ministry of corporate affairs and CAG. The lenders can obtain a specific certification from the borrowers’ auditors regarding diversion/siphoning of funds by the borrower. The rules also specify that banks and financial institutions may ensure incorporation of appropriate covenants in the loan agreements to facilitate such certification by auditors. RBI stipulates that lenders may engage their own auditors for such specific certification purpose without relying on certification given by borrowers’ auditors for ensuring proper end-use of funds and preventing diversion/siphoning of funds by the borrowers. Bank must invariably exercise basic minimum own diligence in the matter.

Master directions issued by RBI in January 2016 consolidate all regulatory matters under various Acts and are put on the RBI website. Proper medicine is prescribed for chronic NPA infection, but what is missing is strict implementation. Creating more rules, regulators and watchdogs may lead to overlaps, confusion and would prove to be counterproductive. If prompt administration of extant rules is taken care of and due diligence is exercised by regulators, bank management, auditors, audit committee and the board of directors, the NPA crisis can be resolved.