Bharat SainiLast Updated on February 27, 2017 by Bharat Saini
With a view to widen the process of resolving bad loans, government has asked all Public Sector Banks (PSBs) to approach the two member overseeing committee, consisting of Janki Ballabh, former Chairman of State Bank of India & Pradeep Kumar, former Chief Vigilance Commissioner, set up by Indian Banks’ Association in consultation with Reserve Bank of India (RBI) as well as vigilance and investigating agencies to help banks take measures to address all their bad loans and not just the accounts under S4A.
S4A or Scheme for Sustainable Structuring of Stressed Assets is an optional framework for the resolution of large stressed accounts was introduced. S4A is applicable where promoters are competent even while their projects are overly indebted. The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments, which are expected to provide upside to the lenders when the borrower turns around. Thus, capable-but-over-indebted promoters have some incentive to perform, and because the project is not deemed an NPA, if adequate provisions are made, public sector banks continue lending to it, if necessary.
The government and the RBI have taken various initiatives and legislative measures to Clean up Banking such as the enactment of the Insolvency and Bankruptcy Code, 2016 passed by the Parliament offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms); amendments to SARFAESI (Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest) Act and Debt Recovery Tribunal. The other Schemes for Resolution are creation of Central Repository of Information on Large Credits (CRILC), a large loan database of credit exposures of Rs. 5 crore & above, has been set up & information shared with all the banks; formation of Joint Lender’ Forum (JLF) to explore various options through Corrective Action Plan (CAP) to resolve the stress in the account; the 5/25 Scheme that allows banks to extend long term loans of 20-25 years to match the cash flows of projects, while refinancing them every 5 or 7 years and Strategic Debt Restructuring (SDR) scheme introduced to enable banks to displace weak promoters by converting debt to equity, where promoters are often unable to bring in new funds.
The government is ready to consider the idea of some of the stressed assets in specific sectors being taken over by the Central Public Sector Enterprises (CPSEs).
Finance Minister had last year encouraged banks to take over the assets of defaulters. This will necessarily involve the banks invoking their powers under the contract, converting a part of the debt into equity, taking control of those units and appointing a management team of established people from either current or retired representative who have great experience of those sectors.
This was to be an interim arrangement to ease the burden of non-performing assets on banks’ balance sheets. It is not going to help banks if they keep these assets on their balance sheet as their Capital to Risk (Weighted) Assets Ratio (CRAR) is above the norms of BIS (Bank of International settlements). PSBs Stressed Assets touched 12 percent as on June 30, 2016.
Financial Stability Report (FSR) released by Reserve Bank of India (RBI) on December 29, 2016 gives an assessment of risks to financial stability as also the resilience of the financial system and confirms that overall; India’s financial system remains stable although banks continue to face significant levels of stress. FSR states that the risks to the banking sector remained elevated due to continuous deterioration in asset quality and increased non-performing assets, low profitability and liquidity.
