From the day banking started, bankers always had a plan for handing loans going bad. Banking says giving loans has a credit risk due to various reasons. Banks become a partner to the borrower when they provide loans and when the units are not doing well, they collaborate to find out reasons and suggest solutions. This includes moratorium, restructuring, extending the repayment period and in some cases even compromising a portion of the interest. When everything fails they used to go for a compromise settlement called one time settlement (OTS) or write off. This never affected the Banking system as the percentage of write off used to be low and the trust between the banker and borrower also played a role. All this changed with the report of M. Narasimhan called ‘The Committee on Financial System’. Separate guidelines were issued in 1994 called IRAC norms (Income Recognition and Asset Classification) in March 1994 allowing banks to keep sub standard assets for 2 years. Even before this report banks had their own asset classification norms. This standardisation of asset classification without guiding how to handle this loans did not really help the banks. In 2001, RBI introduced a scheme called Corporate Debt Restructuring scheme (CDR) for loans above Rs.10 Crores.
This scheme clearly favoured the corporates providing for restructuring the loan upto 10 years; The borrowers sacrifice should be atleast 15% of the lender (85% could be written off) and gave enormous powers to the empowered group consisting of executive Directors of banks and executives.
Various studies have shown that CDR was not successful.
The percentage of NPA to total assets kept on increasing except in the first 3 years.
Various methods were used with a hope to reduce NPA. They are Lok Adalats, Debt Recovery Tribunals & SARFAESI Act.
In fact the borrower has many options when the loan goes bad like
- Winding up under the Companies Act 2013 (Earlier 1956)
- Arrangements or Compromise under the Companies Act 2013.
- Restructuring under Sick Industrial Company Act (SICA)
- Reconstruction of Assets under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and
- Restructuring Under Corporate Debt Restructuring.
Study reports have shown that all this helped the borrowers and not the Banks. The recovery percentage has been very poor and reasons laid out are
1) Adverse business environment
2) Very poor or no stake of the borrower
3) Imprudent Accounting
4) Poor planning reflected in mid-stream change
5) Lack of coordination among lenders and also lack of due diligence.
After CDR, RBI came up with a scheme called Strategic Debt Restructuring Scheme (SDR) famously known as 5:25 as the repayment period could be extended upto 25 years for loans above Rs.500 Crores.
This was another misadventure. In 2016, RBI introduced another scheme called Scheme for Sustainable Structuring of Stressed Assets (S4A Scheme). Again for loans above Rs.500 Crores.
None of this worked in favour of banks and a report of the Parliamentary Committee on NPAs in its report of Feb 2016 has analysed the reasons and suggested solutions but thrown into dust bin.
Then came the insolvency and bankruptcy code and the National Company Law Tribunals which are again classic examples of favouring the corporate.
Now we have the Kamath Committee Report (Sept 4, 2020) which neither helps the borrower nor the banker. It has confined itself to Covid-19 related stress. The defects of this report are
- Resolution frame work is applicable only for borrowers classified as Standard Assets as on March 1, 2020 though the economy was on the downslide even before that
- It has to be invoked before Dec 31, 2020 knowing well that recovery is too far.
- Resolution plan (RP) should be implemented within 180 days of invocation.
- The residual tenure can be extended maximum for 2 years.
- RP may include conversion of debt into equity. (Banks did this with Kingfisher and the shares were not even worth toilet paper)
- You require an Inter Creditors Agreement (ICA), Forensic Audit, Valuation report from 2 valuers, rating from a rating agency, Techno-Economic viability report, Stock and Receivables Audit, Financial Viability study and Legal Compliances. All this will not be possible for a borrower who is genuinely in difficulty. But people who are cheats will be able to produce everything and get away with the loot.
- Applicable only to 26 sectors namely, power, construction, Iron & Steel, Roads, Real Estate, Wholesale trading, Textiles, Chemicals, Consumer Durables /FMG, Non-Ferrous metals, Pharmaceuticals Mfg, Logistics, Gems & Jewellery, Cement, Auto Components, Hotel, Restaurants & Tourism, Mining, Plastic Products Mfg, Automobile Mfg, Auto dealership, Aviation, Sugar, Port & Port Services, Shipping, Building Materials, Corporate Retail outlets, clearly favouring the corporate.
The Committee has recommended threshold for 5 ratios namely, TOL/ATNW, Total Debt / EBITDA, Current Ratio, Average DSR and DSCR. This does not mean anything new to the banks. For borrowers it is not going to be of much relief. Banks have already announced their own schemes where they are going to charge 1% Interest more (SBI), in addition to that a processing fee (HDFC) etc. Ultimately all this accounts will be NPA after 2 years and you will have no option other than write off. That will be restructuring OR destroying the banks. Some will collapse, some will merge but most of them will be privatised at a throw away price.
Kudos to Narasimhan to Kamath, the destroyers of the banking system.
Thomas Franco is former General Secretary of All India Bank Officers’ Confederation.