China Moves Toward Launching Credit-Default-Swap Market

China’s interbank-market regulator is likely to seek approval from China’s central bank to launch a CDS market soon

The National Association of Financial Market Institutional Investors is likely to ask the People’s Bank of China for formal approval to launch a CDS market soon

China is edging closer to launching its own version of a popular hedging tool that protects investors in case of defaults, as the world’s No. 2 economy struggles to cope with slowing growth and record numbers of companies not paying back debt.

The National Association of Financial Market Institutional Investors, an industry body backed by China’s central bank, has consulted major banks and brokerage firms in recent weeks about the planned rollout of credit-default swaps, three people familiar with the situation said. The swaps would pay out if the issuer of a bond or a loan defaults, said the people, who were briefed by the regulator on the matter.

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The regulator, which oversees China’s $8.5 trillion interbank bond market, has drafted guidelines and standardized contracts for the product, one that has in the past two decades become a key tool in global markets to hedge government and corporate debt, the people said.

NAFMII has hired a group of lawyers to help align its CDS rules with internationally accepted practices and is expected to ask the People’s Bank of China for formal approval to launch the market soon, one of the people said.

Officials at NAFMII weren’t reachable for comment.

The planned rollout of rules for CDS reflects the pressures China faces as it tries to attract more investors, including global players, to a swelling bond market, even as debt defaults soar. China’s domestic bond market has had 39 defaults totaling around 25 billion yuan ($3.8 billion) this year, already exceeding the total of 20 defaults worth 12 billion yuan for all of last year. In 2014, there were five such defaults, following one in 2013.

 “If the [CDS plan] is carried out well in China, it will certainly be a big help to investors,” saidWang Ming, a partner at Shanghai Yaozhi Asset Management Co., a bond fund that manages two billion yuan in assets.

China experimented with a less sophisticated version of a CDS called a credit-risk-mitigation agreement, or CRMA, in 2010, in the wake of a credit binge. But the CRMA market never took off, because the state kept bailing out insolvent companies instead of letting them default, in the interests of financial and social stability.

Now, there are signs that Beijing and the country’s local governments are becoming more tolerant of debt defaults as the economy weakens further and governments feel increased fiscal strains.

“The timing is indeed better now for CDS to be introduced to China. Given that all kinds of defaults are on the rise, I think demand will be quite robust,” Mr. Wang said.

The guidelines and standardized contracts for the credit derivative drafted by NAFMII look to be in line with those published by the International Swaps and Derivatives Association, a global body based in New York that sets standard terms for derivatives transactions, said one of the people briefed on the instruments.

So great is the enthusiasm for CDS in China that some officials seem to view them as a way to help ailing companies get credit. The government of the northern province of Shanxi, China’s biggest coal-producing region, said it hopes to encourage credit-default swaps as a means to raise investor confidence in debt issued by the area’s struggling coal-mining firms. Typically big coal miners are backed by the state.

According to a front-page article published Thursday in the Shanxi Daily, the Communist Party’s local mouthpiece, companies from the region are facing greater difficulties in issuing new debt because of a weakening economy and rising debt defaults among state-run enterprises.

One of the coal-mining firms from the province that is struggling to meet its debt repayment, state-backed ChinaCoal Group Shanxi Huayu Energy Co., defaulted on a 600 million yuan one-year bond in April.

“We’ve already come up with a plan, and Shanxi would like to become the first local government to roll out a CDS contract in China,” said Liu Hongbo, an official at the financial affairs office of the Shanxi provincial government.

CDS are normally created by investment banks, which calculate the default risks involved and charge sometimes steep fees for the guarantees, and it is unclear how Shanxi province proposes to handle them.

Bill to amend Sarfaesi, debt recovery tribunal Acts cleared by Lok Sabha

The amendments to the Sarfaesi Act and debt recovery tribunal Act are aimed at faster recovery and resolution of bad debts by banks and financial institutions

Arun Jaitley (Finance Minister)

In an important step aimed to resolve bad loans, the Lok Sabha on Monday passed a bill to amend the existing Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, and the debt recovery tribunal (DRT) Act.

The amendments are aimed at faster recovery and resolution of bad debts by banks and financial institutions and making it easier for asset reconstruction companies (ARCs) to function. Along with the new bankruptcy law which came into effect earlier this year, the amendments will put in place an enabling infrastructure to effectively deal with non-performing assets in the Indian banking system.

The government had introduced the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 in May. The bill was referred to a joint Parliament committee which submitted its report last month. The bill will amend four acts—Sarfaesi Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1899 and the Depositories Act, 1996.

The bill will now go to the Rajya Sabha for its approval. Introducing the bill, finance minister Arun Jaitley said the government has accepted all the recommendations of the joint committee.

“The bankruptcy law is now becoming operational. One of the big challenges we face is the enforcement of interest and recovery of bad debts. Securitization law and DRT law need to be amended for quick disposal of disputes,” he said. “DRTs were envisaged as an alternative to civil courts and for ensuring quick disposal. But things need to move faster. Procedures in front of DRTs cannot be similar to civil courts,” he said.

Indian banks have been under stress with many of them reporting losses and surge in non-performing assets (NPAs) after the Reserve Bank of India (RBI) pushed lenders to classify visibly stressed assets as NPAs after an asset quality review in 2015-16. Total stressed assets of state-run banks as of 31 March were at 14.5% of total advances, and according to recent report released by RBI, this may increase further. The gross non-performing asset (NPA) ratio of state-run banks may rise to 10.1% by March 2017 from 9.6% as of March 2016, RBI’s financial stability report said, warning that under a severe stress scenario, it may rise to 11% by March 2017.

Flaws in the existing recovery process have added to the problem of bad loans. For instance, more than 70,000 cases are pending before DRTs.

The bill gives RBI powers to audit and inspect ARCs and the freedom to remove the chairman or any director and appoint central bank officials to its board. The central bank will be empowered to impose penalties for non-compliance with its directives, and regulate the fees charged by these companies to banks at the time of acquiring such assets.

The bill will also pave the way for the sponsor of an ARC to hold up to 100% stake. It will also enable non-institutional investors to invest in security receipts issued by ARCs and mandate a timeline for possession of secured assets.

To be sure, RBI already regulates these entities, but the bill expands the regulator’s powers. It also increases the penalty amount that can be levied by RBI to Rs.1 crore from Rs.5 lakh.

The bill proposes to widen the scope of the registry that will house the central database of all loans against properties given by all lenders.

It also proposes to bring hire purchase and financial lease under the ambit of the Sarfaesi Act, and enable secured creditors to take over a company and restore its business on acquisition of controlling interest in the borrower company.

As part of the overhaul of DRTs, the bill proposes to speed up the process of recovery and move towards online DRTs. To this effect, it proposes electronic filing of recovery applications, documents and written statements. DRTs will be the backbone of the bankruptcy code and deal with all insolvency proceedings involving individuals. The debtor will have to deposit 50% of the amount of debt due before filing an appeal at a DRT. It also seeks to make the process time-bound. A district magistrate has to clear an application by the creditor to take over possession of the collateral within 60 days.

However, many members of Parliament said the government should have the political will to check NPAs rather than enacting one law after another.

Saugata Roy, MP from All India Trinamool Congress representing West Bengal, said, “Political will is necessary and that seems to be missing. Bankruptcy and insolvency code has been passed. In spite of passage of laws, we have not seen much progress on either curbing black money or on NPAs of banks. Total stressed assets have crossed Rs.8 trillion,” he said.

The bill also proposes to amend the Indian Stamp Act to exempt deeds of assignment signed at the time of an ARC buying a loan from a bank from the levy of stamp duty.

“The amendments carry the work forward done in the insolvency and bankruptcy code. Automation will help in increasing the pace of recovery, but this requires an investment. Currently, the problem is that many DRTs from time to time do not have presiding officers,” Sandeep Singh, senior director at India Ratings said.

ICICI Bank, Apollo to set up asset reconstruction firm

ICICI Bank to hold 30% stake, rest to be picked up by Apollo subject to passage of amendment in Sarfaesi Act proposed in the budget

ICICI Bank, the country’s largest private sector lender, has tied up with private equity firm Apollo Global Managementand Aion Capital Management to set up an asset reconstruction company (ARC) in India.

In a statement, the lender said they have entered into a memorandum of understanding (MoU) to work together for debt resolution in the country, in an effort to revitalise and turn around over-leveraged borrowers.

“The objective of the collaboration will be to streamline the operations of borrowers, facilitate deleveraging and arrange additional funding on a case-by-case basis. The collaboration will bring together ICICI Bank’s experience and understanding with respect to the Indian corporate sector, and Apollo’s experience of more than two decades in private equity and alternative investments, including special situations,” the statement said.

People familiar with the development said ICICI Bank will have 30 per cent stake, while the remaining will be picked up by Apollo subject to the fact that the amendment suggested in the Union Budget is passed. In case, if the Bill isn’t cleared, then they will look for a third partner to pick up a 20 per cent stake.

In the Budget, Finance Minister Arun Jaitley had proposed to amend the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, to allow sponsors to hold 100 per cent equity stake in ARCs and that non-institutional investors would be allowed to invest 100 per cent in security receipts.

The Aion fund was earlier established through a strategic partnership between ICICI Venture Funds Management Company and an affiliate of Apollo Global Management.

ICICI Bank already has a 13.26 per cent in another ARC, Arcil. Sources familiar with the development said the lender is not immediately looking at selling out this stake and will take a call on it in due course. Despite having an investment in Arcil, ICICI Bank is believed to have had gone ahead with the plan of setting up another ARC because as a result of multiple partners and a small stake, it wasn’t possible for the lender to make any significant decisions on its own.

“The bank will use this to resolve some stress on our own books but we will like it to be an open architecture where other banks can also sell their bad loans. But the main focus will be on resolution of some large assets first so that it makes a meaningful difference on the balance sheet,” said a person privy to the deal.

The lender has been facing asset quality pressure for the past few quarters. In the quarter ended June, its gross non-performing assets (NPA) as a percentage of total advances jumped to 5.87 per cent from 3.68 per cent a year ago. In absolute terms, the gross NPA rose to Rs 27,194 crore against Rs 15,138 crore in the first quarter of the previous financial year.

The increased interest by players in ARCs has increased after the Department of Industrial Policy and Promotion said in a notification that 100 per cent foreign direct investment (FDI) in reconstruction companies will be allowed under the automatic route.

According to an Assocham report, the average recovery rate for ARCs in India has been around 30 per cent of the principal and the average time taken has been anything between four and five years.

These ARCs in the country has been facing a problem due to capital constraints and disagreeing on valuation with the banks. However, considering that the total gross NPA in the banking sector at the end of FY16 was Rs 5,41,763 crore (7.43 per cent of total advances), these ARCs do see a big opportunity in India. Several other players like KKR and Brookfield, among others, are also investing in the ARC space.

Our immediate focus is to increase deposit base: Bandhan Bank’s Ghosh

‘In next two to three years, we intend to reach out to people across urban and unbanked areas’

CHANDRA SHEKHAR GHOSH, MD and CEO, Bandhan Bank

Bandhan Bank became a reality in August 2015. Chandra Shekhar Ghosh, Founder, Managing Director and CEO of the bank, maintains that the bank’s focus will be to grow its deposit base. In a little over the first three months of the current fiscal, its deposits increased by 3,000 crore. On the sidelines of a CII event, Ghosh spoke to BusinessLine on the journey (as a new bank), focus areas in the coming days and the bank’s corporate and retail lending operations. Excerpts:

How has the journey been for Bandhan Bank during these 11 months?

In one word fantastic. People have reposed faith in us. And we have been able to build trust. Our deposit base, which stands at 15,000 crore as on date (12,000 crore till March 2016) is proof of that. Loan disbursals stand at 16,000 crore of which 200-250 crore is non-microfinance related disbursals. We have around 89 lakh customers, majority of whom are micro-credit related. Around seven lakh will be non-micro-credit customers.

What are your immediate plans?

Our immediate focus is increasing our deposit base. For the next two to three years, we intend to reach out to people across urban and unbanked areas.

Any plans for increasing the branch network?

Yes. We currently have 689 branches in 29 States. We would look to take that up to 850 by March (2017).

As a new bank, you need to compete with established players in urban areas. What strategy are you following?

Urban growth is faster than rural and semi-urban areas. People here look for variety of products and fast services. We now have that bouquet of offerings.

For example, our current account offering competes with any other private sector bank. Similarly, in the savings account we are offering 6 per cent rate of interest for deposits over 1 lakh.

In terms of services, we are also looking to add a personal touch — meeting people, reaching out to customers.

For us, it is more about giving a personal touch, making people comfortable, rather than just a mechanical form of banking.

In any service industry, personal interactions matter. It may be old-school or a traditional approach. But for a new bank like us, it is very important.

Bandhan is still hesitant on corporate lending…

As a bank I cannot say that we will not lend to corporates. But, there are specific areas of focus. We are open to lending to MSMEs (micro, small and medium enterprises), and small and medium-sized corporates. We have already lent to Wow Momo (a Kolkata-based start-up). When it comes to large corporates or those in the stressed sectors, we would like to maintain caution for now. Six months or one year from now, we might have a different strategy.

What about retail lending?

Microfinance loans apart, in retail lending we are exploring the housing loan segment in the range of 35-50 lakh. We would also like to tap/ target people who generally go to housing finance companies for loans. There is a big market out there, and as a bank we are well positioned to tap it.

Let me explain. I have been working in a village with the unbanked for a decade now. But, there were other people too with different needs. As an MFI we did not focus on them. But as a bank we can target these people.

When banks return to retail lending

Banks burdened by NPAs in areas such as infrastructure seem to be back in the retail game, after a retreat in the years since 2005-06. How will this play out?

With an increase in the bad loans burdening the books of the banking sector, commercial banks once again seem to be focusing on the retail lending business. While broadly defined as lending to individuals, retail lending covers a host of loans: those meant for investment in housing, those for purchases of consumer durables and automobiles and those for education, deferred payments on credit card expenditures or unspecified purposes.

The post-liberalisation changes in banking practices included an increased emphasis on retail lending, which transited from being a risky and cumbersome business to one considered easy to implement, profitable and relatively safe. In some instances, such as housing, the income earned (rent received) or expenditure saved (stoppage of rent payment) from the investment is seen as providing a part of the wherewithal needed to service the loan.

In other areas, confidence that future incomes to be earned by the borrower would be adequate to meet interest and amortisation payments provides the basis for enhanced retail lending.

Too much exposure

The result of the transition in perception has been a sharp increase in the share of retail lending in total advances since the early 1990s. After having risen gradually from 8.3 per cent of total outstanding bank credit at the end of 1992-93 to 12.6 per cent in 2001-02, the share of personal loans rose sharply to touch 23.3 per cent at the end of 2005-06 (Chart 1). This was a time when total bank credit too was booming.

It is to be expected when there is a sharp increase in lending to a few sector of this kind, those who would have earlier been considered risky or not creditworthy could enter the universe of borrowers.

Not surprisingly, by this time the fear that overexposure could result in an increase in defaults had begun to be expressed.

Addressing a seminar on risk management in October 2007, when the subprime crisis had just about unfolded in the US, veteran central banker and former chair of two committees on capital account convertibility, SS Tarapore, warned that India may be heading towards its own home-grown sub-prime crisis (‘Sub-prime crisis brewing here, warns Tarapore’ BusinessLine, October 17, 2007).

Banks too began to hold back as reflected in a gradual decline in the ratio of personal loans to gross bank credit from 23.3 per cent to 15.6 per cent in 2011-12. While this was still above the level at the beginning of the previous boom, the decline in share did suggest that the retail lending splurge had moderated.

However, more recently, this decline in the share of retail lending has reversed, rising from 15.6 per cent in 2011-12 to 16.6 per cent in 2014-15. Figures on rates of growth tell a clearer story.

According to Care Ratings, over the financial years ending March 2015 and March 2016, while overall non-food credit grew at 8.6 and 9.1 per cent respectively, personal loan growth rates were 15.5 and 19.4 per cent respectively.

Over the financial year ended March 2016, the home loan segment grew by 19.4 per cent, vehicle loans by 22 per cent, and credit card outstanding by 23.7 per cent.

House of cards

The reason for this turn are not difficult to find. First, the other major area of growth in bank lending has been infrastructure, which today accounts for a large proportion of the non-performing assets on the books of the bigger banks. So banks have been seeking out new avenues of lending. With industry not performing too well and agriculture languishing, retail lending emerges as the preferred choice.

Second, since retail lending was discouraged in the period prior to financial liberalisation, the exposure of the retail sector to debt is still quite low.

The ratio of personal loans to personal disposable income has indeed increased in India, from 2.4 per cent at the end of 1995-1996 to 13 per cent in 2007-08, and it still is at a historically high level of around 12.5 per cent (Chart 2).

However, this is extremely low when compared with, say, South Korea, where in 2013, when it faced a housing loan crisis, the ratio of household debt to household disposable income was around 150 per cent.

While that may be far too high a figure for a country like India with a much lower per capita income to approach, it has considerable headspace in this area.

Finally, default rates on retail lending, even if increasing, are still quite low. In the case of the State Bank of India for example, NPAs in its retail loan portfolio are placed at a little above 1 per cent, whereas the aggregate NPA ratio is above 6 per cent according to recent estimates. So shifting to retail lending seems a sound idea.

Segments of concern

That of course depends on the degree to which increasing exposure in the retail market requires diversifying the retail portfolio of banks. As of now, housing loans overwhelmingly dominate that portfolio, accounting for well above 50 per cent of the total (Chart 3).

With loan-to-value ratios in housing still low in many cases, and housing serving as good collateral, NPAs in this segment are among the lowest. There are three other areas that account for a reasonable share of personal loans outstanding: automobiles, education and credit card outstanding.

Of these, while the automobile loan segment is not a high default area, education is definitely proving to be so. Government policy mandates provision of education loans of up to ₹4.5 lakh without collateral.

So recovery too is difficult. Yet the inability to find jobs after financing education with loans is resulting in rising defaults, which, according to reports, average 8 per cent of such loans.

Moreover, well over a quarter of retail lending is in the “others” category, and possibly includes personal loans for unspecified purposes advance without collateral or lending against shares, etc. by banks trying to build their retail portfolio.

Here too, rising default is a probability as aggregate lending increases and recovery difficult.

That prospect notwithstanding, it is more than likely that India would witness another retail lending boom, led by banks trying to maximise their presence in this ostensibly underexploited area.

That may well result in exposure of a kind that warrants the fears expressed earlier by the late SS Tarapore.

RBI clears decks for universal banking

Issues new norms for ‘on-tap’ licensing; large industrial houses barred

The Reserve Bank of India on Monday unveiled guidelines for ‘on-tap’ licensing of new private banks, opening the door for entities such as Edelweiss Financial Services, JM Financial, LIC Housing Finance, Magma Fincorp, Muthoot Finance, Shriram Capital and UAE Exchange & Financial Services, which had missed the bus in the last round, to float universal banks.

The guidelines in respect of promoter eligibility, corporate structure, foreign shareholding, dilution of promoter group shareholding and listing on the stock exchanges appear liberal as compared to the 2013 guidelines under which IDFC Ltd and Bandhan Financial Services were allowed to set up banks.

Under the new guidelines, resident individuals and professionals with 10 years’ experience in banking and finance are eligible to promote universal banks. Previously, only entities/groups in the private sector, entities in the public sector and non-banking financial companies (NBFCs) were eligible.

Large industrial houses are excluded as eligible entities, but can invest in the (universal) banks up to 10 per cent. A universal bank is a bank offering retail, wholesale and investment banking services under one roof.

Under the new guidelines, a Non-Operative Financial Holding Company (NOFHC) is not mandatory for setting up a bank in case the promoters are individuals or stand-alone promoting/converting entities who/which do not have other group entities.

The RBI has said that in case a bank is to be set up through an NOFHC, a promoter/promoter group should hold not less than 51 per cent of the total paid-up equity capital in the holding company. Earlier, entities/groups had to set up a bank through a wholly owned NOFHC.

Entities/groups in the private sector that are ‘owned and controlled by residents’ and have a track record of at least 10 years, are eligible as promoters. If such entity/group has total assets of ₹5,000 crore or more, the non-financial business of the group should not account for 40 per cent or more in terms of total assets/gross income.

Existing NBFCs ‘controlled by residents’ with a track record of at least 10 years are also eligible as promoters. However, any NBFC, which is a part of the group that has total assets of ₹5,000 crore or more and where the non-financial business accounts for 40 per cent or more is not eligible.

Paid-up capital

The initial minimum paid-up voting equity capital has been left unchanged at ₹500 crore. However, thereafter, the bank must have a minimum net worth of ₹500 crore at all times.

The criteria requiring promoter/s and the promoter group / NOFHC to hold at least 40 per cent of the paid-up voting equity capital, which will be locked-in for five years from commencement of business, remains unchanged. The promoter group shareholding will need to be brought down to 15 per cent within 15 years (from 12 years earlier).

The (universal) bank has to get its shares listed on the stock exchanges within six years (from three years earlier) of the commencement of business.

The current aggregate foreign investment limit is 74 per cent will apply to universal banks. Under the earlier regime, the aggregate non-resident shareholding could not exceed 49 per cent for the first five years.

George Antony, Managing Director, UAE Exchange India, said: “…The final call on application for the universal banking licence will be decided post the board meeting to be convened shortly.”

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.