President Pranab Mukherjee Approves Ordinance On New Bad Loan Resolution Plan
Slow resolution of bad loans has prompted the government and the RBI to come up with a new resolution plan
President Pranab Mukherjee approved the ordinance to amend the Banking Regulation Act, 1949, paving the way for a new framework to deal with the problem of nonperforming assets, according to news agency Asian News International.
The Union Cabinet on Wednesday promulgated the ordinance and sent it to the President for his assent. Finance Minister Arun Jaitley is expected to provide details of the new NPA resolution plan later today.
Desperate Times Call For Desperate Measures?
The situation has come to pass as bad loans have piled up on the books of banks, which loaned heavily to sectors like infrastructure, steel and power during high-growth years of 2010 to 2012. At the time, the assumption was that growth will continue to be strong and required clearances would be easy to come by. The assumption proved to be incorrect.
At first, banks tried to keep reported bad loans in check but an asset quality review (AQR) conducted by the Reserve Bank of India (RBI) in 2015 forced lenders to recognise stressed loans appropriately. The result has been a near doubling of gross non-performing loans (NPLs) between September 2015 and December 2016 to over Rs 7 lakh crore. Stressed assets, which include restructured loans, are higher at Rs 9.64 lakh crore.
“Right now, the powers are available (to the RBI under the Banking Regulation Act) but the government in its wisdom must have thought that some more sharper focus is needed,” HR Khan, former deputy governor of the RBI told BloombergQuint on the phone.
Once the details are out we will see what the intention of that amendment is...about RBI getting into individual cases and suggesting haircuts and all that, I don’t think that is the intention. But if that gets in somehow, that would be neither desirable nor feasible.HR Khan, Former Deputy Governor, RBI
To help resolve this stress, the RBI has handed banks a number of tools. This includes the joint lenders’ forum (JLF), which is intended to speed up decision making. For restructuring debt into equity, the S4A (Scheme For Sustainable Structuring of Stressed Assets) and the SDR (Strategic Debt Restructuring) schemes have been introduced. The latter even allows lenders to overturn the management of a defaulting firm.
The RBI and the government have also tried to strengthen private asset reconstruction companies by allowing 100 percent foreign direct investment.
Resolution, however, has continued to be slow.
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Who Could Get Impacted?
Firms that may be impacted by the new rules are those which have large amounts of debt and are either already tagged as NPAs or are in the restructured category. Many of these firms are concentrated in the infrastructure, power and steel sectors, where debt levels are well in excess of what their cash flows can service.
A February Corporate Health Tracker report from brokerage house Credit Suisse had pointed out that stress in steel and power remains high. It added that stress in telecom is also on the rise.
“While stress is spread across sectors, metals, utilities and infra and construction continue to contribute ~50 percent of the total stress of Rs 15 lakh crore,” the report said.
The report had noted that 41 percent of debt tracked by them remains with companies with interest coverage ratio of less than one. The interest coverage ratio represents the ability of a firm to service interest from its earnings.
Data from Credit Suisse shows that 65 percent of steel firms had an interest coverage ratio of less than one at the end of the December 2016 quarter. 67 percent of power companies and 45 percent of telecom firms also have an interest coverage less than one.
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