Take A Deep Breath; Bad Loan Resolution Is Moving, Says Rashesh Shah Of Edelweiss

There’s a near pindrop silence on the 15th floor of the Edelweiss Tower. Located in Mumbai’s Kalina area, the glass exterior building is the hub of the now 20-year-old financial services firm founded by Rashesh Shah and Venkat Ramaswamy soon after liberalisation.

The silence we encounter on the executive floor of the building on a mid-week summer afternoon is anything but a reflection of the activity within the group. Businesses ranging from asset management to wholesale and retail credit and asset reconstruction are being run from behind the closed doors.

Of these, the asset reconstruction business has attracted considerable attention in the last two years. In financial year 2014-15, Edelweiss Asset Reconstruction Company (ARC) overtook Arcil, the country’s oldest ARC, in terms of assets under management.

Over the last four years, Edelweiss ARC has bought Rs 35,000 crore in stressed assets. This at a time when the common refrain in the industry is that banks are finding it hard to sell close to Rs 10 lakh crore in stressed loans.

The quantum of bad loans in the banking sector nearly doubled after the Reserve Bank of India (RBI) conducted an asset quality review and forced banks to classify stressed assets appropriately. While the recognition of stressed loans is near complete, resolution has been slow despite various tools provided by the regulator.

Unrealistic pricing of bad loans, inability to make provisions and unwillingness to take tough decisions are the now often-cited reasons behind this inability of banks to sell their bad loans.

Rashesh Shah, the 53-year-old chairman and chief executive officer (CEO) of the Edelweiss Group, disagrees. In casual banter, he says that talking about bad loans is fashionable these days and everyone is an expert. People need to take a deep breath, he says while adding that the problem is getting solved bit by bit.

“I am sorry to say this is partly a creation of the media. Because everyone expects everything to get sold overnight,” Shah tells BloombergQuint in an interview on April 12 at the group’s headquarters.

He goes on to lay out the numbers as he sees them:

• In the last four years, roughly Rs 2 lakh crore in bad loans have been sold
• This is about 20-25 percent of the overall stressed assets held by banks
• These assets have been sold, at an average, of 50 cents to the dollar
• Banks are selling anywhere between Rs 50,000 crore and Rs 80,000 crore (5-8 percent) in bad loans annually
• At this rate, over the next four years, another 20 percent in bad loans will get sold

Not everyone views the numbers with Shah’s glass-half-full lens.

At a Bloomberg organised private equity forum in mid-March, Sanjay Nayar, head of KKR’s India unit, which has applied for an ARC licence, said that the market for bad loans is “nowhere near clearing price”.

In a report dated March 28, Sanjiv Prasad, co-head of Kotak Institutional Equities, took a similar position. “We have hardly seen any progress on private ARCs acquiring large-sized stressed assets from banks..,” wrote Prasad while attributing this to the inability to establish the right price for stressed assets and inadequate capital among private ARCs.

While Shah doesn’t buy the narrative that there is no resolution in sight, he acknowledges that banks want to sell far more than what is getting sold.

As an example, he says that if banks are putting up Rs 2 lakh crore in bad loans for sale, about Rs 40,000 crore to Rs 50,000 crore is actually being bought. “But that is because those loans are not priced at the right level or they are loans that are not revivable,” Shah says.

A Year Away From Large Bad Loan Sales

Shah believes that the pace at which bad loans or non-performing assets (NPAs) are getting sold will pick up in the next 12-18 months. That statement doesn’t stem from hope but from fact.

Under the existing rules, banks are required to step up provisions against bad loans over a period of time. The rules say that the longer a loan remains in the ‘doubtful’ category, the more a bank has to provision against it.

In the first year, the minimum provision is 25 percent but this goes up to 40 percent if the loan remains stressed for one to three years. Since a large proportion of bad loans were recognised in financial year 2016-17, banks will have to step up provisioning this year if the loans remain stressed.

As banks step up provisions, they will be in a better position to take haircuts on these loans.

Closing that gap may not be easy as the funds required to make the necessary provisions are large.

In a February report, brokerage house Credit Suisse cautioned that there is a ‘wall of provisioning ahead’ and estimated that the additional provisioning needs in financial year 2017-18 could be as high as Rs 86,000 crore.

Noting the slow pace of resolution and the large provisioning needs, Credit Suisse, which has tracked the corporate debt crisis closely, called for government intervention of some kind. It suggested considering a bad-bank like structure which can be used to speed up the process of cleaning up bank balance sheets. Others, like Nayar of KKR, too have supported a bad bank.

Shah disagrees.

In his view, it is essentially to stick to a market-based mechanism to ensure realistic pricing of stressed assets. The market should decide the fair price for every loan based on recoverability, he says.

Besides any government intervention will give rise to murmurs of crony capitalism, Shah cautions. He thinks the government has been pragmatic by not giving in to calls to find an ‘overnight’ solution to a bad loan problem that has been created over years.

Shah chooses an unusual analogy to make his point.

“...if a kid is to be born, it will take nine months. No matter how good a doctor you are, you can’t do it in five-six months.”

Helping The Process Along

That’s not to say that Shah wants the government and the regulator to be completely hands off. There are small steps that can be taken to help the process along.

One such step is to create an environment which can help banks take tough decisions on haircuts without fearing prosecution down the road.

“Something like an oversight committee which will allow bankers to have some kind of ring-fencing and protection,” Shah suggests. Such oversight committees are actively under discussion, BloombergQuint reported in March.

Shah also believes that the Insolvency and Bankruptcy Code can play a significant role. Edelweiss ARC has already taken four cases to the National Company Law Tribunal (NCLT) and Shah thinks the introduction of the code will prove to be a defining moment for Indian business.

The court-driven resolution committees can provide bankers comfort on taking tough decisions, says Shah. In addition, the bankruptcy code has also helped clarify that creditor dues are superior to government dues such as unpaid taxes.

In fact, he believes that the existence of the code has already titled the scales in favour of creditors.