Amidst a protracted phase of slow global growth, India is undoubtedly a stellar performer by virtue of being the world's fastest growing major economy. But the ‘twin balance sheet problem’ can potentially destabilise the capacity expansion plans needed to keep the economy on a sustainable high growth trajectory. Banks, pressed with bad loans, are reluctant to lend, especially to infrastructure and manufacturing sectors, and the private sector investment appetite is tepid.
At this juncture, it is imperative to revive private investments and free up the banks, especially the public sector banks (PSBs), so that the lending cycle can resume. The government has done well in introducing the Insolvency and Bankruptcy Code (IBC) to bring about an orderly and time-bound resolution of the stressed assets. However, the IBC is still in the evolution phase, and is getting fine-tuned gradually.
The reasons behind a loan turning bad can be varied. They can be endogenous factors like government actions/inactions or errors by promoters in making financial projections or they can be exogenous like abrupt changes in market dynamics or sudden geo-political disruptions. In such a scenario, the ideal approach for a lender should be to provide all sorts of assistance to the promoters to tide over the difficulties. Assets like infrastructure and manufacturing units, once stalled, may lead to some time and cost overrun, but once those are revived they can more than compensate the loss incurred. IBC should be the last resort.
Unfortunately in India, a few cases of mismanagement and diversion of borrowed funds by some errant promoters have got so much media coverage that this has led to the creation of an atmosphere of suspicion about corporate borrowers. While the guilty ones must be meted out exemplary punishment, it is grossly unfair to paint the entire business community with the same brush. We need to get rid of this mindset fast, or else we will not be able to groom entrepreneurs.
While IBC will deal with the existing stock of stressed assets, it is imperative to stem the flow of bad loans. For that, it is essential to address the issues which are within our control. The government, on its part, has to provide clearances and approvals in time and cannot bring in retrospective changes in regulations and policies.
Structural reforms are needed in our banks, especially the PSBs, so that their decision making improves. It is worth exploring why the PSBs have much higher NPAs vis-à-vis their private counterparts. When a loan turns bad for a private bank or an NBFC, the normal practice is to discuss it with the borrower and find out an amicable solution and/or resolution. If the company can be nursed, it is better to do so first, before pushing it to an Asset Reconstruction Company (ARC) or putting it under IBC. But PSBs are skeptical about taking any decision because such actions can be investigated later, leading to possible instances of witch-hunting. PSBs, therefore, play it safe and opt for a status quo, even if that means loss for all the stakeholders and a colossal wastage of resources. Even under the IBC process, the PSBs prefer auctioning off a stressed asset even if that results in gross under-realisation of the loan value. Therefore, providing immunity to PSB management and their Boards can go a long way in addressing the bad loan problem and in professionalising the decision-making process. There should be encouragement provided to PSBs to nurse companies back to health rather than consigning them to the grave.
PSB Boards usually comprise of representatives from Reserve Bank of India (RBI), Ministry of Finance, Chartered Accountants, professionals with legal experience, but what seems to be missing is the presence of people with adequate industry experience i.e. those who can provide sectoral insights while evaluating project proposals and then taking credit decisions. The decisions, made on commercial lines, should not be subject to investigation later on.
Another aspect worth reviewing is the definition of NPAs. It defies logic why the same yardstick for NPA classification should apply for different asset classes like a car, a home and an infrastructure project. For example, the variables affecting an infrastructure loan are far too many and much more complex than the other two asset classes. Thus, the risks associated with each asset class are different. By that logic the definition of NPAs should also vary asset-wise.
As Indian financial institutions begin a phased adoption of Indian Accounting Standards (Ind-AS), which are in alignment with Inter-national Financial Reporting Standards (IFRS), the banks and NBFCs should be allowed to develop the NPA norms which are in alignment with USA and Europe. The regulator should leave the decision for provisioning, inherently a commercial decision, to the financial institutions. Under the new accounting norms, the provisioning has to be based on perceived losses and not on incurred losses.
As India is in global spotlight and global investors are keenly following every development in India, therefore, it would be more responsible for us to deal with the problems in the banks in a logical and commercial manner, than to indulge in kneejerk reactions. It is imperative to protect the assets because once it is destroyed due to neglect and improper and untimely action; there is no way to revive it back leading to colossal waste of capital, enterprise and employment. Therefore, the regulator, government and media will have to take actions and react in a manner which does not discourage genuine companies and enterprises from investing.
— The author is the Chairman and Managing Director
of Srei Infrastructure Finance Limited