The spurt in stressed assets in the Indian banking system, in recent years has emerged as a major problem. The regulator has been attempting to put in place remedial measures, which are both preventive and curative. While there is a collective effort being made, the problem persists and the need of the hour is to mitigate and seek a balanced pragmatic solution without further delay. In the above backdrop, Brescon, alongwith Indira Gandhi Institute of Development Research (IGIDR), organised a half day workshop and brought together a cross-section of experts in the area including senior bankers, ex-regulators and industry participants, for an informal deliberation on the issues involved and outline a balanced approach that was workable and fair to creditors and debtors, within the tools that are available.
After the welcome address by Dr. S. Mahendra Dev, Director, IGIDR, Mr. Nirmal Gangwal, Founder, Brescon Advisors Ltd shared his perspectives as a practioner in resolution of stressed assets for over twenty years. A regulatory perspective on stressed assets was presented by Mr. Anand Sinha, ex-RBI Deputy Governor. The thematic presentation and moderation of the discussions were delivered by Dr. Ashima Goyal, Professor, IGIDR. After a long brain storming session, the views were summed up by Mr. S. Sridhar, ex-CMD of Central Bank of India.
Gist of discussions
- There is an urgent need to put in place the appropriate financial architecture to deal with the issue and save assets in national interest. Investment cycle is not expected to revive until 2019 and hence solutions would need to be found within the current framework. If the stressed accounts are not restructured quickly, they will not be able to take advantage of an upturn in the economy.
- At a fraction of the cost of setting up of new facilities, it is possible to revive the investment made in such facilities, which is suffering on account of lack of working capital.
- The corporate sector would look to addressing the legacy issues before undertaking any major investment. Financial restructuring alone will not solve the problem without action on the policy front. The example of the roads sector where due to pragmatic policy changes by GoI, resolution of stressed assets is under way and fresh bank lending to the sector has commenced shows this.
- Aggressive provisioning backed by aggressive capitalisation seems to be the way forward. Capital raising capability of the PSBs is currently constrained. Given that GoI will not dilute its equity stake in PSBs below 51% and GoI’s funds constraints, the provisioning could be moderated by permitting provisioning over a period of 3-5 years linked to a corresponding capital infusion by GoI. This will give a breather to the banks as well as GoI. It is relevant to note that Basel III norms provides for transition period for meeting various norms.
- The word “NPA” needs to be de-stigmatised. One time dispensation be given to banks allowing first time restructuring without downgrading the asset classification since NPA has wider ramifications–staff accountability for the banker, constrains the borrower from raising funds from other lenders as also debars them from bidding for Gov. contracts etc.
- There is a need to seriously consider revisiting the erstwhile Development Financial Institution model for meeting financing needs of infrastructure and core industries, either by setting up new institutions or strengthening existing institutions, adequately supported by way of low cost long term funds.
- While PSBs, as trustees of public money, need to be accountable, the consequences of accountability need to be moderated. The distorted incentive system placing a premium on lack of action in the public sector banks needs to be corrected. The proposal to amend the Prevention of Corruption Act must be taken to implementation.
- It is important that the intermediaries involved in valuation/ techno economic viability studies, deployed by banks, should be monitored. They should be accredited, say to Indian Banking Association (IBA) who could function as an SRO in this regard.
- Right of lenders to convert 20% of the outstanding debt into equity, at the discretion of the lender earlier allowed in term lending, should be revived. This will permit banks to recoup the haircut in debt resolutions and to exercise better oversight, for example through nominee directors on the boards of corporates.
- The Insurance Regulatory and Development Authority (IRDA) should allow insurance companies to invest in additional Tier-1 bonds of the banks, which would assist in meeting the capital adequacy requirements for the banks.