By Parush Arora
The efforts of the Government as well as the Reserve Bank of India to deal with the malaise of the Non-Performing Assets (NPAs) haven’t reaped any result yet. The NPAs are increasing day by day and have risen to about 12.3% of the total loans. These statistics are a bad sign for India as such idle assets block the capital and hinder investment in other viable projects.
NPAs at a glance
Many schemes have been launched in the past two years to tackle the problem of the non-performance of these assets. However, as is evident from the current figures, none of these offered an effective solution. The NPAs refused to budge; instead, the figures kept rising. The stressed assets comprise NPAs, restructured loans as well as written-off assets. Out of these, only the NPAs are included in the calculation of bad loans. Consequently, the problem of the Indian banking system is much more than what these numbers tell us.
Fleeting attempts of the past
Corporate Debt Restructuring (CDR) was the first attempt to get rid of the menace of bad loans. In this scheme, the debt of the company is reorganised by decreasing the interest rates or increasing the time of maturity to reduce the burden on the stressed debtor. This scheme was followed-up by Strategic Debt Restructuring (SDR). SDR calls for a change in the management to ensure that the shareholders are the primary loss-bearers rather than the debt-holders. It gives the option of converting the debts into equity shares, given the investors are available to buy it. The banks evoked the provision of SDR in 21 cases. However, out of these 21 cases, only 2 have been closed.
Subsequently, Scheme for Sustainable Structuring of Stressed Assets (S4A) came into the picture. S4A allowed banks to convert 50% of a companys loans into equity or equity-like instruments without the need of finding investors immediately. This scheme also underperformed and eventually lead to and no significant results.
All these schemes tried to restructure the bad loans by converting a share of them into equities within a given period. However, only those investments which were undertaken commercially came under their ambit. Many investments in power sector which did not come about as commercial due to lack of permits and regulatory clearance could not be included under the schemes. Moreover, banks were short of time when putting the Schemes into action and the timeline given to them for the restructuring appeared to be impractical.
When things were not moving the way they should have, there arose a need to force the things to fall into place. This is exactly why the RBI has decided to intervene.
RBI to become a commander-cum-regulator
In this backdrop, it might appear that the schemes introduced in the past were themselves flawed and ineffective. This conclusion is incorrect and warrants a need to look at the causes of their failure. Too much hype about the schemes and their formulation led to the neglect of a strategy for their implementation. In other words, the schemes acted as a vehicle without an engine. The Schemes were wisely drafted and could have been the cure to the problem of NPAs. Notwithstanding this wisdom, the banks fell short of time and faltered in recovering the loans. Thus, RBI has decided to step in in the capacity of a “big brother”. This intervention springs from the authority given to the RBI by the ordinance promulgated by President Pranab Mukherjee on 4th May. This ordinance allows the RBI to direct banks on how to resolve stressed assets.
Among other things, the ordinance grants the RBI “a right to direct banking companies to initiate insolvency resolution process in respect of a default under the provisions of the Insolvency and Bankruptcy Code, 2016”. Under the ordinance, the RBI is also empowered to establish sector-related oversight panels that will shield bankers from later action by probe agencies considering loan recasts. The Central Bank can impose a penalty on banks that fail to implement the consensus decision and in the case of disagreement, it can strip the bank authorities from their power.
Will the ordinance make a difference?
RBI might have to face rebellious bankers questioning the transition of its role from a regulator to that of a commander. Also, one argument is that at certain points, the decisions by the RBI may lead to worse results than those which banks could have extracted if they had autonomy.
Nonetheless, the collaboration of government and the apex bank has definitely sounded a knell for the unscrupulous debtors. The recent measures have sent a strong message to them that they cannot get away with defaults and that the future holds serious trouble for them.
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