If one were to examine this business of non-performing assets objectively, the absolute power at the disposal of the regulators to rein in the malfeasance is phenomenal. And yet, we seem to be impotent in the way we deal with slippery defaulters
It is like falling between two stools, falling between two extremes. For, on the one hand you have the Reserve Bank of India scheme titled 5/25 and on the other side of the vector, the SARFAESI Act. Cronyism has ensured that Indian banks were allowed to fall off the cliff, turning into a malfunctioning magnet. That the past is irredeemable is a given. Struck by a conscience attack after Vijay Mallya’s flight to safety, the Government is now talking about cracking down on defaulters. The intent seems to be there because the situation of continuing drift has made banks vulnerable to going belly up. On Monday last, there was news that the bank consortium led by SBI had put Adhunik Power’s (outstanding debt Rs3,120 crore) assets on the block under the SDR scheme. SDR or Strategic Debt Restructuring is yet another important element in the cosy bank-corporate arrangement which has been allowed to fester all these years. In a peculiar case of ever-greening and postponing recovery of stressed assets, the RBI last June came up with a new scheme which allowed the lender consortium to convert a substantive part of their loan into equity, forcing the banks to take majority control, ie owning over 51 per cent.
If one remembers, the Kingfisher Airlines loan was also recast into equity for the 17-bank consortium led by SBI at a 61 per cent premium, and in a mono typical case, creditors had also become shareholders who ended up owning 23 per cent of the dud airline’s equity. That was obviously a one-time sweetheart amnesty scheme and had the same majority control over the airline been exerted then, KFA may have been saved at that point in time.This scheme allows lenders to take a convenient detour in terms of relaxation of the RBI rules for as much as 18 months. Over this 18-month period, the lender consortium can sell the company with distressed assets to a new promoter and recover the dues. In the eventuality that its fails to comply with this window of opportunity, then lenders have to treat these assets as non-performing assets and make 100 per cent provision for the same on their own books. It is believed that as many as 17 companies have seen banks take majority control in order to recover loans amounting to Rs85,000 crore. Alok Industries Rs15,350 crore; Gammon India Rs14,810 crore; Monnet Ispat Rs12,500 crore; Electrosteels Steel Rs10,990 crore; IVRCl Rs10,340 crore, are the leading lights in this Debt A list.
In the Alok Industries case, on Tuesday, the Bombay High Court ruled that until a winding-up petition filed by HSBC against it is settled, the company cannot sell its assets or change its equity structure. Fixing the next date for hearing as April 6, the consortium led by SBI has been baulked. HSBC, on behalf of a consortium of unsecured lenders led by VTB Capital, has filed a petition to liquidate Alok Industries and settle outstanding dues worth $55 million from a loan of $125 million that the company had taken. Simply said, unsecured lenders have no place in this SDR equation and they have the potential to disrupt the process to recover the dues.
Now we come to the RBI’s 5/25 scheme, a classic manoeuvre to keep elephants and camels hidden under the carpet, even as they eat the very innards of bank balance-sheets like termites. So, a corporate is allowed to restructure its humongous debt over a 25-year period with terms to be reset every five years. Taking darts to a dartboard, as per the 5/25 flexible structuring scheme, the lenders are allowed to fix longer amortisation period for loans to projects in the infrastructure and core industries sector, for say 25 years, based on the economic life or concession period of the project, with periodic refinancing, say every five years. One can argue that infrastructure and core industries projects are long gestation projects, but a nudge and a wink often determine the future of loans advanced by the banks to corporates. Once the 5/25 scheme comes into play, then it automatically becomes open ended. Equally, while one realises that gestation projects are longer in India because fuel supply constraints, land acquisition issues, delay in regulatory approvals and clearances have often stalled the progress of these critical sectors, misuse is still rampant. Thus, it is vital for banks to develop a robust due-diligence and escrow mechanism as borrowers may misuse this scheme and divert funds to other projects.
Knowing fully well, that both the SDR and 5/25 schemes come with inbuilt pitfalls and imponderables, in early February, RBI Governor Raghuram Rajan once again raised Cain. “The RBI has not told banks what to do. We have discussed with them a range of accounts and essentially given them some time to figure out how these accounts are regularised or moved into different categorisations. Our role is only to make sure this process is uniform across the banks and essentially ensure that over a period of time banks’ balance sheets are both fully provisioned as well as assets that could go bad are recognised as such and classified as such”, he said. Rajan wants to strengthen both the schemes and ensure that they are not used to ‘fiddle’ with existing NPAs. A special refinance window for core sector loans is a wonderful nomenclature for bad loans.
Now let us approach the problem from the prism of the banks and how quickly they can stick to Rajan’s March 31, 2017, boom barrier of cleaning up balance-sheets. While the monikers of 5/25 and SDR allow elasticity to the defaulters to escape the dragnet, India also has a SARFAESI Act, which gives banks punitive powers. What is shocking is banks have wilfully ignored the rising NPAs, once again throwing into stark relief the decadent culture of crony capitalism where banks, Government officials and corporates share the same bed.
In January 2015, the Supreme Court, dismissing appeals filed by around 60 companies, upheld the amendment to the Securitisation Act that gave powers to financial institutions to decide a period after which a bad loan can be declared as a non-performing asset. Before the 2004 amendment to the Securitisation Act and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI Act), RBI was the regulator for the banking, non-banking and securitisation institutions for deciding the period after which loans could be treated as NPAs. Till 2004, RBI had set the NPA period for banks at 90 days and at 180 days for NBFCs. Significantly, the Act allows banks and other financial institution to auction residential or commercial properties of defaulters to recover loans.
If one were to examine this business of non-performing assets objectively, the absolute power at the disposal of the regulators to rein in the malfeasance is phenomenal. And yet, we seem to be impotent in the way we deal with slippery defaulters. Vijay Mallya constantly used litigation to stall banks in their quest to monetise his assets and surprisingly won most rounds. Despite all this despondency, the biggest upshot in the war on NPAs is that some of these stringent laws are forcing corporates to hawk assets suo moto and pay back the banks. The other big positive is that, stung by the Vijay Mallya episode, the Government has directed public sector banks to immediately invoke personal guarantees of promoter/directors and recover loans from them in case the companies fail to repay. Middle-class anger is rising, and as we have seen in the past, it can turn into a tidal wave in no time.