Banks scrambling to get books in order as deadline for resolution of bad loans looms
Banks are scrambling to get their books in order to meet a 31 March deadline set by former central bank governor Raghuram Rajan to clean up their balance sheets but the scale of the problem means a resolution is unlikely in a matter of days.
The number of meetings of joint lender forums (JLF) are increasing and banks are hawking around Rs15,000 crore of bad loans to asset reconstruction companies (ARCs), said bankers aware of the development. But very few expect this deadline to be met.
Indian banks are carrying about Rs 7 trillion of bad loans on their books, as of 31 December 2016.
In December 2015, Rajan had set a March 2017 for banks to clean up their books, but analysts don’t see an end to the crisis especially when bankers are unwilling to take a haircut to sell bad loans and a shaky economy impacts cash flow generation of stuck projects. Global rating agency Moody’s Investor Services, for instance, said earlier this year that it expects the level of stressed assets to increase by another 100-150 basis points (bps) in the next 12-18 months.
One basis point is one-hundredth of a percentage point.
“The JLF meetings have now started to pick up steam after a slight slowdown during the demonetisation period. We are hopeful that resolution in many cases will begin,” said a senior official at a large state-run bank, who is part of such forums.
Banks were asked to form JLFs in cases where multiple banks were involved and the delay in repayment had crossed 60 days. These forums were expected to work within a definite period of time to resolve cases of distress and allow for more control by banks in cases before they turned into NPAs.
According to the banker cited earlier, the conversation at these meetings have been focussed on the resolution or sale of stressed cases. Avenues such as the insolvency and bankruptcy code are still in the initial stages of application and bankers have made use of them only in select cases. However, until it effects any sustainable recovery in these cases, the code will continue to be used sparingly, bankers said.
One key hurdle for stressed asset resolution is the markdown banks are willing to take on the value of their bad loans.
“No one wants to take a large haircut since they are not fully convinced that they will be protected against investigative agencies,” the banker cited earlier said.
In January, the Central Bureau of Investigation (CBI) had arrested former IDBI Bank chairman Yogesh Aggarwal and some former executives of the bank for lending to Kingfisher Airlines at a time when the company’s ability to turn around was questionable. It was only last week, Aggarwal and former deputy managing director of the bank B.K. Batra were granted bail by the Bombay high court.
“If bankers are expected to face a witch hunt for business decisions, then it is in their favour to not take such major decisions,” said a second public sector banker, also speaking on conditions of anonymity as he did not wish to be quoted.
The fear of public sector bankers to take significant write downs on stressed loans is likely to have a major impact on the turnaround of these cases, as these lenders control at least two-thirds of the total bank loans in the system and a greater proportion of bad loans. Delays in decision making is likely to make the turnaround more difficult.
Former Comptroller and Auditor General Vinod Rai, who was appointed as the head of the Bank Boards Bureau, wrote a letter to finance minister Arun Jaitley and the Prime Minister’s Office, underlining the tardy progress made by public sector banks in resolution of bad loans, the Press Trust of India reported on Sunday.
According to the chief of a large ARC, who spoke on conditions of anonymity, lenders have already put up about Rs 15,000 crore worth bad loans up for sale. While some of these assets are good, the pricing continues to be an area of contention between banks and reconstruction firms.
In a set of guidelines that it released in September 2016, the RBI had asked banks to favour more all-cash deals when selling stressed loans and asked them to reduce the level of security receipts (SRs) on their investment books, which have been traditionally used in ARC sales.
“Asset quality pains are expected to continue for some more time. Moreover, this quarter is also not going to see any major mark-to-market profits on treasury investments. Hope is that higher recoveries during the fourth quarter will help banks publish better numbers. At some point in time, bankers will have to just bite the bullet and take those long pending decisions, else we will never get out of this situation,” said Karthik Srinivasan, senior vice president, ICRA Ltd.