By Priyanka Venkat
On 14th September 2017, Credit Rating Information Services of India Limited (CRISIL) came out with the news that could provide respite from the crushing impact of non-performing assets (NPA) on banks in the country. The rating agency said that recovery in the credit quality of corporates, driven by benefits from lower interest rates, higher commodity prices, improved capital structures and efficiency gains could stop stressed assets from rising significantly (current level is Rs. 11.5 trillion) in the medium term.
Impact on the banking sector
The banking sector and the economy have seen the adverse effect of increasing NPAs in the form of diminished profits to lenders, and reduced credit flow to the economy. The announcement by CRISIL however, bodes well for banks. According to CRISIL, gross NPAs in the banking system are expected to be about 10.5 per cent of advances as of March 2018, up from 9.5 per cent as of March 2017. Considering that a large proportion of stressed assets are currently recognized as NPAs, the remaining portion of the corporate loan portfolio of banks are expected to perform better over the medium term. The recognition of the assets as NPAs is an important step to kickstart the resolution process.
Uncertainty about the end-results
Gurpreet Chhatwal, the President of CRISIL, believes that the performance of micro, small and medium enterprises could be negatively impacted. This is due to the recent announcement of farm loan waivers and the impact of Goods and Services Tax (GST). Though the loan waivers have caused an increase in agricultural loan NPAs, it is expected to go down when funds are transferred to banks to compensate for the same. In the future, however, NPAs could arise again because of the possible erosion of credit discipline resulting from the waivers. The impact of GST and demonetization, while deeply felt by Micro, Small & Medium Enterprises (MSMEs), is less likely to affect banks to the same extent because their debt holdings are spread over many sectors as opposed to being concentrated, like in the case of corporate loans.
The need for quicker resolution
A quicker resolution of NPAs through the Insolvency and Bankruptcy Code (IBC) and schemes such as Strategic Debt Restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A), would provide relief to the banks from the burden of NPAs. The Insolvency and Bankruptcy Code, 2016 lays down separate time-bound processes to facilitate insolvency resolution. A bankruptcy case is referred to the National Company Law Tribunal, and once it is accepted, there needs to be the implementation of a resolution plan within 180 days that can be extended by 90 days. If this timeline hasnt been met, the company will be liquidated.
While doubts have been cast on certain tenets of the code, a proper and well thought out implementation of the code could do wonders for reducing the delays in NPA resolution. Its implications will be felt in the economy, in the form of credit flows, as money recovered from stressed assets can be invested or given as loans elsewhere. Thus, the move not only forces creditors to be wary and pay their dues quickly but also frees up capital.
SDR and S4A as feasible solutions
Alongside the implementation of IBC, SDR and S4A also play a crucial role in NPA resolution. The SDR scheme endows the lending bank with the right to convert full or part of the debt into equity shares in the borrowing company. To initiate the SDR, the decision is taken by the Joint Lender Forum (JLF) and has to be approved by a minimum of 60% of the creditors by value and 50% by number. The Join Lender Forum is a committee comprising banks that have given loans to the defaulting borrower. The objective behind SDR is to provide lending banks with the opportunity to recover their stressed assets by taking an active part in bringing in strategic investors.
S4A, on the other hand, involves segregation of outstanding debt into two parts. One part is called sustainable debt. This is that part of the debt that can still be serviced or repaid. The other part will be converted into equity or quasi-equity instruments that will allow lenders to benefit from the increase in prices when the borrowing bank starts recovering. This scheme can be implemented when the aggregate exposure of all institutional lenders in the account is more than 500 crores. The major benefit derived from S4A is that it gives depositors and investors an insight into the amount of debt that can or cannot be serviced.
While CRISILs announcement could indicate brighter times ahead for the banking sector, tangible benefits will only be accrued when there is an effective and timely resolution of stressed assets. This will go a long way in initiating recovery and combating sluggish credit flow in the economy.
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