In the past three weeks, a panel led by PNB chairman Sunil Mehta and comprising SBI chairman Rajnish Kumar, SBI deputy managing director Venkat Nageswar and Bank of Baroda managing director P S Jayakumar have put in sincere, serious efforts to resolve the mountain of non-performing loans (NPAs) of banks.
NPA under Rs 50 crore:
The Mehta panel divides NPAs by size. Those below Rs 50 crore, totalling Rs 2.1 lakh crore, are largely SMEs and normally held by a single bank.
For these, each bank must set up a stressed asset vertical, which will draw up templates customised for each type of asset and these should be applied in a non discriminatory manner.
A high-powered committee should validate the resolution schemes including providing more funds. The entire process should be time-bound- i.e. within 90 days, loans from Rs 50-500 crore, totalling about Rs 3.1 lakh crore of NPAs, would usually be accounts involving many banks.
For these accounts, banks have been goaded to sign an inter-creditor agreement which gives the lead bank the authority to put together a resolution.
It may get turnaround experts to run the company or organise a bidding process to sell the asset. If 66 percent of the lenders by value agree, the others have to fall in line. The IBA is to set up a high powered committee which will vet each resolution plan.
NPAs between Rs 500-1500 crore:
For loans from Rs 500-1500 crore, the same inter-creditor-agreement will apply with the lead bank organising the sale. But here a troika of asset management company, an asset reconstruction company and an Alternative Investment Fund will be formed by the banks with majority private sector participation.
In these large loans, the lead bank will once again have the right to suggest resolutions including the sale of the asset. But the difference is that here, the soon-to-be set AMC-ARC-AIF combine will assess the asset and provide a floor price, such that if other bidders put in too low a bid, this ARC-AIF will take over the asset and turn it around so that PSU banks can keep the upside since they will be part investors in the AIF.
The Mehta Panel's recommendations to solve the NPA problems:
The first achievement of the Mehta panel is the Inter-Creditor Agreement (ICA). Backed by minister Piyush Goyal, such an ICA was needed after the RBI did away with entities like the Joint Lender Forum.
The banks needed to meet under some inter-bank entity and this ICA which all bank boards have been directed (some say “ordered”) to sign provides the legal framework.
The ICA, sources say, will mostly be ready in the coming week. So far, so good. Beyond this agreement, one finds it difficult to sound optimistic.
Here’s why: Even if the ICA decrees that a loan be auctioned, dissenting banks can take the asset to the Insolvency courts. Even if these banks fall in line for fear of the shareholder, operational creditors and unsecured lenders can take the loan to the NCLT. So the 66 percent rule may not necessarily give the lead bank much elbow room unless all parties are addressed. The ability to attract top talent to an AMC mooted initially by public sector banks looks tough. Bankers expect private banks and turnaround companies like Alvarez and Marsel and Edelweiss to pick up a stake. It is unclear why Alvarez and Marsel or Edelweiss will agree, when they will actually be competing for the same assets, through their ARCs. The ability of such a bank-led entity to pay top dollar for what is clearly scarce talent is suspect. Setting up the AIF may be tougher. And making it work much tougher. The ARC-AIF combine is expected to work on an arm's length basis. Entities like Brookfields, KKR, the Canadian Fund CDPQ are expected to invest in this fund. SBI has worked for three years with Brookfield on such an idea but couldn’t get the fund to sign on the dotted line. Even if it is luckier this time, such a fund may easily take close to a year to fructify. And why would such funds agree to bid at a floor price? Would they also not want competitive IRRs or rates of return? The PSU banks are most keen to save power companies that are languishing for want of Power Purchase Agreements or Fuel Supply Agreements for coal. The hope is that rather than sell them for liquidation value in today’s “surplus” power situation, the banks-mooted AIF must invest in them, maintain them through their AMC and sell them at a better price when power demand picks up and PPAs get signed. But if indeed there is such a bright future for these plants surely they would find buyers in the NCLT process. The harsh truth is no banker or fund manager is sure of the future of these companies given that hardly any state has allowed power tariffs to rise this year and the aim of bringing power losses through theft to 15% is still a distant dream. Expecting discoms to be nursed back to financial health so that they can sign fresh PPAs also looks a very distant dream. Given these issues, it is tough to see how a REC-led Parivartan plan or a Mehta-plan devised AIF will save nearly 2 lakh crore of power plants from getting into the Insolvency process. What is worse, in the NCLT ( national company law tribunal) most experts expect these plants to go for liquidation value. In the intra-bank SME cases, and in the bank led resolutions, bankers are supposed to take a call whether units need more funds to survive. High power committees are supposed to vet such lending. But given the large-scale chargesheeting of bankers by the CBI, one fails to see which banker will lend more funds to an NPA account. Just to refresh memories: in one case 15 bankers and three independent directors of IDBI were chargesheeted for a Rs 500 crore additional loan to what was then the fourth largest telecom service provider. In another case, two former bank chairmen were chargesheeted without even an FIR against them and in the most bizarre of them all former and serving senior bankers were arrested by the “state” police for a depositors’ complaint against a builder. It may be too optimistic to expect bankers to boldly and speedily “resolve” cases under such circumstances. Procrastination until retirement may be the preferred course.
The Rs 10 lakh crore of bad loans looks likely to yield very little. That is the stock of bad loans. What is promising is the flow of NPAs. The combined effect of the Reserve Bank’s February 12 circular and the coming into being of an inter-creditor agreement sets the stage for bankers to swing into action as soon as they see stress in a borrower.India may have to write off its stock of bad loans, but she looks all set to stem the flow of NPAs. That may be the best outcome of this decade long sad saga of Indian NPAs.