When will banks start lending for project finance? The answer to this million-dollar question largely boils down to creating a better dispute-resolution mechanism and tighter contracts with borrowers. Having burnt their fingers over the past few years, bankers will now provide project finance only if they see a chance to recover their investment quickly in case things go south. At the Business Standard Banking Roundtable held last week, bankers made it clear that very few banks would go big on project financing until the government created the ecosystem for the resolution of issues. They have a point: The gross non-performing assets (NPAs) of the banking sector stood at Rs 6.3 lakh crore in the June quarter, and restructuring is on in barely a fraction of these cases. Schemes such as strategic debt restructuring (SDR) and sustainable structuring of stressed assets (S4A) have not met with much success. Under these schemes, banks have not been able to agree with promoters on valuation, convert their debt into equity, and find managers or new buyers to run the businesses.
The Insolvency and Bankruptcy Code, 2016, is expected to address some of these concerns. On their part, lenders will be held accountable for implementing the resolution plan. Under the law, which will consolidate the existing laws, cases will have to be disposed of within 180 days. An additional 90 days can be taken to handle insolvency. The current process is significantly more time-consuming. Debt recovery tribunals (DRTs) have seen a pile-up of 70,000 cases, amounting to a value of over Rs 5 lakh crore, due to adjournments and prolonged hearings. Cases to resolve insolvency will be transferred from the DRTs to the National Company Law Tribunal (NCLT), which will have to be staffed adequately to handle the volume. A fourth of these 70,000 cases will be transferred to the NCLT with immediate effect. Thus, the new law will create its own challenge in expediting cases.
Bankers say there is no shortage of demand for funds, which will only increase as the economy chugs along. However, they also want tighter contracts so that borrowers understand that the money has to be repaid and that they cannot lead lavish lifestyles at the expense of banks. The future of financing projects could well be governed by take-or-pay contracts and if things do not work out, the funds are to be returned. Bankers also accept that there are enough honest promoters out there who may have set up projects in good faith but are unable to get them going because of changes in the external environment or regulations or public protests. In this area, bankers want a more structured approach where access to natural resources, land, approvals and backward-forward linkages are in place before funds are committed. This is where the government will have to change its approach and step in to provide all the clearances to such projects. Under the current circumstances, it is not just bankers shying away from funding large-scale projects; even promoters who have learnt their lesson the hard way will want all these things in place before they reach for their cheque books.
