Bad loans: Bankers shift focus to resolution from recognition

After two laborious years of recognising stress in big-ticket loans, banks have moved on to resolution even as they want the existing tools to be fine-tuned to make them more potent in recovering dues. In the absence of a fool-proof recovery mechanism, banks, however, are wary of scaling up lending. That was the consensus among some of the country’s leading bankers at the Business Standard Banking Round Table 2016 held in the city on Thursday. 

Despite the tools for resolution not being perfect, bankers were satisfied that the government and the regulator were proactive in recognising the lacunae and were making changes that would allow banks a better grip on the loan recovery situation, the bankers said.

 

The panellists were HDFC Bank Managing Director Aditya Puri, ICICI Bank MD & Chief Executive Officer Chanda Kochhar, Union Bank of India Chairman & MD Arun Tiwari, Axis Bank MD & CEO Shikha Sharma, Citi India CEO Pramit Jhaveri, and IDFC Bank MD & CEO Rajiv Lall. 

At the round table, bankers took the opportunity to warn borrowers that they would not hesitate to take harsh steps to recover their money. 

“The message from the government, Reserve Bank of India and banks is we are not here for charity. You take my money, you give it back. When the ship sinks, you will have lot more resolutions, lot faster and nobody will think of king’s lifestyle with our money,” said Puri.

For now, even as there is ample demand for big-ticket loans, banks are hesitant to open up their purses.
 

“No bank is going to provide financing to private sector greenfield infrastructure projects for some time at a scale, and the government has to understand that until the soft infrastructure of dispute resolution and contractual infirmity is not resolved, you will not get available financing allocated to project finance in this country,” said Lall, whose bank, the latest commercial lender in the system, was until a few months back an infrastructure finance company. 

Lall was supported by all the others on the panel. 

“In the new world, I see projects are going to get financed only if there is a tighter contract,” said Sharma. “Forget banks, even promoters are going to look at it that way, because if banks have suffered, promoters have suffered in those projects as well. They were probably hoping to get some equity value in those cases and the equity value has been eroded,” Sharma added. 

According to Jhaveri, “there is no loan which is non-interest bearing and non-repayable,” but “a disproportionate amount of risk was being borne by banks.” 

The next round of growth, though, they said, should come from the secondary impact of government spending. They were unequivocal that banks had made strides in loan recovery. Even as non-performing assets (NPAs) get reflected in banks’ books with a lag and differ from bank to bank, when a particular account becomes bad to a lender, resolution across the banking system was on a strong footing. 

“We have seen more change of management in the last 18-24 months, than in the history of the financial sector. Resolution takes some working through the system, but it is happening,” said Sharma. 

Kochhar seconded Sharma saying, “We as an industry should focus on resolution. Banks themselves are conscious of recovery and going about it in a focused manner. Promoters have understood that they will have to sell assets in order to deleverage.” 

A shot in the arm has come from RBI and the government, as the system is becoming “an enabler of resolution mechanism,” through the bankruptcy code and RBI’s restructuring norms. 

Taking advantage of the recovery mechanism, banks either directly or indirectly, forced their corporate clients to sell non-core assets. “In the last two years, we have seen sales of Rs 1.5 lakh crore finalised — the largest ever in any corporate history,” said Kochhar.  This sale has been possible after two years of working on those deals, bankers said, underlining the fact that it needs patience for results to get reflected.  However, the tools for resolution have to be fine-tuned further. For example, the Scheme for Sustainable Structuring of Stressed Assets (S4A) was good to start, but was not workable, said Tiwari. He said, "S4A was good to start with on A4 sized paper but it was not working. And after all the suggestions we gave the RBI, one can be sure that new format of S4A will be workable,” Tiwari said.  

Under the S4A scheme, banks can convert debt into equity and take over a company and change the management. 

However, Kochhar said banks cannot just convert debt to equity and keep taking assets without having buyers because the tools the RBI has given are supposed to help reach some ultimate resolutions and not result in banks taking ownership of assets and then not knowing what to do with them. 

But, the signal is clear that the ecosystem is coming into place for better NPA resolution. 

“What gets borrowed needs to be paid back,” is the signal now, said Sharma.