While the Government has taken measures for the recovery of bad loans but it may not be enough as banks have failed to take disciplinary measures against defaulting companies, fearing political and bureaucratic nexus. It must, therefore, be ensured that the lenders have a free hand in enforcing credit administration
As per a report in the Times of India, May 31, bad loans now constitute 11 per cent of the gross advances of banks and 8.4 per cent of the gross domestic product. Total non-performing assets (NPAs), including those for public and private banks, were Rs697,409 crore as of December 2016, according to figures compiled by Care Ratings, The Indian Express. At present, the amount of top 20 NPA accounts of public sector banks (PSBs) stand at Rs1.54 lakh crore.
Recently, the Government legislatively empowered the Reserve Bank of India (RBI) to initiate insolvency proceedings for the recovery of bad loans. It also empowered the regulator to issue appropriate instructions to banks for the resolution of stressed assets.
Discussions are also on for the formation of oversight committees under the aegis of the RBI and other independent committees to decide on a framework for reference for the Insolvency and bankruptcy Code, 2016 (IBC). Hopefully, these measures will give right signals to habitual defaulters and help the banks recover a large part of bad loans that have been outstanding.
So far, the lending banks have failed to take appropriate disciplinary measures against the defaulting companies fearing political and bureaucratic nexus. It must, therefore, be ensured that the lenders have a free hand in enforcing credit administration. However, because of the existence of some irrecoverable loans, there can be the need for considerable write-offs and consequently adequate capitalisation of the effected banks.
It must also be remembered in this connection that a major cause of mounting bad loans is the failure of the larger borrower companies to face competition in the industry. It is understood that there are emerging concerns of possible defaults by some mobile companies due to mounting losses in turn owing to Reliance Jio’s aggressive push. This again is basically competitive pressure. Minister of State (Independent charge), Ministry of Communications, Manoj Sinha, has reportedly advised them to take up their woes with their financing banks.
This is not a correct thing to do. He may be perceived to be indirectly putting pressure on the lenders to restructure the loans, irrespective of the merits. We have seen such influencing in cases of Kingfisher and Air India with disastrous consequences. large Central Public Sector Enterprises (CPSEs) have also failed to cope up with growing global and domestic competition.
It is understood that the top 30 NPA accounts, amounting to one-third of the total NPA and 25 per cent of gross NPA, is accounted for by 50 corporate firms. It is, therefore, obvious that large corporate/projects are the principal recipients of bad loans. In appraising and monitoring of large corporate lending, the following aspects must be evaluated:
Internal factors include diversion of funds, time and cost overruns during project implementation; business failure; inefficiency in management; slackness in credit management and monitoring; inappropriate technology; and lack of coordination betweenlenders.
External factors include recession, price escalation and currency fluctuations, changes in Government policies, environment concerns and accident and natural calamities, just to name a few. In big ticket projects, the lending banks have to go beyond the standard viability scrutiny to include the following aspects:
One of the primary characteristics of project financing is that it provides for off-balance-sheet financing of the project which will not affect the credit of the shareholders or the Government contracting authority, and shifts some of the project risk to the lenders in exchange for which the lenders obtain a higher margin than for normal corporate lending.
These are loan arrangements in which repayment is derived primarily from the project’s cash flow on completion, and where the project’s assets, rights, and interests are held as collateral. A key issue in such non-recourse financing is whether circumstances may arise in which the lenders have recourse to some or all of the shareholders’ assets. A deliberate breach on the part of shareholders may give the lender recourse to assets.
Terms for limited recourse debt for a large project such as a power plant could mean that a creditor is guaranteed to receive 25 per cent of the principal in the event of a default until completion of the power plant.
limited recourse debt will typically pay a lower rate than standard issue of unsecured bonds because of its relative safety. Claims on limited recourse debt sit above both stockholders and unsecured bondholders in terms of payout hierarchy. And for all this, suitable financial, technical and legal expertise has to be built into the credit cells of the lenders. Otherwise, they should keep away from financing of high value.
(The writer is a commentator on contemporary issues)