Ten public sector banks have submitted turnaround plans: Government

As many as 10 state-owned banks including Bank of India, IDBI Bank and Union Bank, have submitted their turnaround plans to the government, which is a pre-requisite for getting fund infusion, Parliament was informed on Tuesday. Allahabad Bank, Andhra Bank, Central Bank of India, Dena Bank, UCO Bank, United Bank of India and Bank of Maharashtra are the other public sector lenders who have submitted their plans. Indian Overseas Bank is currently in the process of preparing its turnaround plan, said Minister of State for Finance Santosh Kumar Gangwar in a written reply in Rajya Sabha.

“It has been decided that any future capital infusion in these banks shall be subject to achievement of select agreed upon milestones as per turnaround plan on quarterly basis,” the minister said.

government news, banking and finance news, business news, indian express newsA monitoring mechanism has been put in place, whereby quarterly performance of these banks would be monitored by SBI Capital Markets, who in turn would keep the Department of Financial Services informed about the same.

“Banks that will not be able to deliver on the agreed upon turnaround plan for a period of two years will be identified as banks eligible for alternative recourse,” Gangwar added.

During recapitalisation exercise undertaken last fiscal, the government had decided that 25 per cent of the total capital requirement of banks (Rs 8,586 crore) will be allocated after achievement of benchmarks set up for select parameters.

HDFC Ltd Q1 profit declines to Rs 2,734 crore

The country’s largest mortgage player HDFC on Wednesday reported marginal decline in consolidated net profit at Rs 2,734 crore for the first quarter ended on June 30. Its consolidated net profit during the April-June quarter of previous fiscal stood at Rs 2,797 crore.

However, total consolidated income rose to Rs 14,463 crore for the quarter as compared to Rs 13,531 crore for the quarter ended June 30, 2016. On standalone basis, HDFC posted a net profit of Rs 1,556 crore for April-June against that of Rs 1,871 crore in the corresponding quarter of previous year.

The company in a statement said the standalone profit numbers for the first quarter are not comparable. “In the quarter ended June 30, 2016, it sold shares of HDFC ERGO General to ERGO International AG, a subsidiary of Munich Re for a consideration of Rs 922 crore and had also created a one-time special provision of Rs 275 crore as a charge to the statement of profit and loss,” it said.

The reported profit before tax for the quarter ended June 30, 2017 stood at Rs 2,359 crore compared to Rs 2,700 crore in the corresponding quarter of the previous year. The effective tax rate for the quarter ended June 30, 2017 was higher at 34 per cent compared to 30.7 per cent in the corresponding quarter of the previous year, it said.

“This was because the stake sale of unlisted shares of HDFC ERGO in the corresponding quarter of the previous year attracted long-term capital gains tax at a lower rate of 23.07 per cent compared to the marginal corporate tax rate. We expect the tax rate to significantly reduce in the subsequent quarters on account of dividend income and sale of investments,” it said.

HDFC Ltd, HDFC Ltd Profit, HDFC Bank, HDFC Bank Profit, HDFC Bank Net Profit, Business News, Banking and Finance News, Indian Express, Indian Express NewsAs a result, it said, the reported profit after tax for the quarter ended June 30, stood at Rs 1,556 crore. Standalone income was at Rs 8,141.76 crore for the quarter ended June 30, 2017, while it was at Rs 8,393.33 crore for the quarter ended June 30, 2016, it added.

The statement further said individual loan disbursements grew by 21 per cent during the quarter. The average size of individual loans stood at Rs 26.3 lakh.

As at June 30, 2017, the loan book stood at Rs 3,12,978 crore as against Rs 2,65,731 crore in the previous year. On asset quality, gross non-performing loans at June 30, amounted to Rs 3,513 crore. This is equivalent to 1.12 per cent of the loan portfolio.

In June 2017, the Reserve Bank of India’s Internal Advisory Committee identified various accounts for reference under the Insolvency and Bankruptcy Code, 2016. The Corporation has an exposure of Rs 909 crore as at June 30, 2017 in one of these accounts, it said. “As at March 31, 2017, though the account was not a non-performing loan, as a prudent measure, the Corporation had made adequate provisioning against this exposure. Thus, no further provisioning was required on this exposure for the quarter ended June 30, 2017,” it said.

SBI to cut NEFT, RTGS charges from tomorrow

A day after it waived charges on Immediate Payment System (IMPS) transactions of up to Rs 1,000, State Bank of India (SBI) on Thursday lowered transaction charges on transfers made through the National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) channels.

NEFT transactions of up to Rs 10,000 will now attract a charge of Rs 1, transactions between Rs 1,001 and Rs 1 lakh will be charged at Rs 2, those between Rs 1 lakh and Rs 2 lakh will be charged Rs 3, while transactions involving higher amounts will be charged Rs 5. Earlier, these charges were Rs 2, Rs 4, Rs 12 and Rs 20, respectively.

RTGS transactions of between Rs 2 lakh and Rs 5 lakh will now be charged Rs 5, as against Rs 20 earlier, and those involving higher amounts will be charged Rs 10, down from Rs 40 earlier. The new charges, which are exclusive of the Goods and Services Tax (GST), will come into effect on Saturday. They will be applicable only to transfers made through internet or mobile banking.

sbi, state bank of india, imps, neft, rtgs, money transfer charges, gst, digital transaction charges, banking news, sbi newsThe reset in transaction charges, ostensibly aimed at pushing digital transactions, puts SBI at something of a disadvantage to its peers in the private sector. Both ICICI Bank and HDFC Bank, State Bank of India’s closest competitors in terms of digital transaction volumes, already earn more from each NEFT and RTGS transaction than SBI does.

Both of them charge Rs 2.50 for NEFT transactions of up to Rs 10,000, Rs 5 for transactions between Rs 10,001 and Rs 1 lakh, Rs 15 for transactions between Rs1 lakh and Rs 2 lakh and Rs 25 for transfers of higher amounts.

RTGS transactions between Rs 2 lakh and Rs 5 lakh are charged Rs 25 by both ICICI Bank and HDFC Bank, while transactions involving amounts larger than Rs 5 lakh attract a charge of Rs 50.

In June, SBI reported 3.13 crore outward NEFT transactions, while the corresponding volumes for ICICI Bank and HDFC Bank were 1.2 crore and 2.18 crore, respectively. Outward RTGS transactions at SBI added up to 13.4 lakh, while the numbers for ICICI Bank and HDFC Bank were 6.28 lakh and 14.28 lakh, respectively.

Newly appointed DEA Secretary Subhash Chandra Garg nominated as RBI’s director

The RBI today said Economic Affairs Secretary Subhash Chandra Garg has been nominated to its central board of directors. Garg replaces his predecessor Shaktikanta Das, who retired after an extended tenure on May 31. The government has nominated Garg as a director to the Central Board, the RBI said. The nomination of Garg is effective July 12, 2017, and until further orders. The Reserve Bank’s affairs are governed by the central board of directors, which is appointed by the government.

Subhash Chandra Garg, SC Garg, Economic Affairs Secretary, RBI director, RBI, Reserve Bank of India, Business news, Indian Express newsA 1983 batch IAS officer, from the Rajasthan cadre, Garg was World Bank executive director for Bangladesh, Bhutan, India and Sri Lanka prior to this appointment. Garg had assumed charge as Economic Affairs Secretary on July 12.

He has widespread administrative experience with more than 30 years of service during which he handled key assignments, including administrative postings in his home state Rajasthan, a finance ministry statement had said. He has also worked at the Cabinet Secretariat where he held the position of joint secretary and additional secretary from February 2012 to December 2013.

Pressure mounts on Reserve Bank of India to cut policy rate, say experts

With inflation falling to record low levels and industrial growth slipping to below 2 per cent, bankers and economists feel the pressure has increased on the Reserve Bank to cut benchmark interest rate next month. The six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel will meet on August 1-2 for the third bi-monthly monetary policy review of 2017-18. The MPC in its previous review in June had retained the repo rate at 6.25 per cent for the fourth straight time citing risk to inflation.

Private sector Kotak Bank is of the opinion that since the RBI has revised down its inflation trajectory sharply in the June policy, and given that inflation reading, the central bank has some room to be accommodative.

“We expect the MPC to cut repo rate by 25 bps in the August meeting,” the bank said in report.

BofA Merrill Lynch Global Research too expects the MPC to cut rates by 25 basis points (0.25 percentage point).

An SBI report said that most inflation risks are now on the downside and expect the retail inflation to be sub-2 per cent for the next month, sub-3 per cent for August-September and sub-4 per cent for October-November and 4-4.5 per cent between December and March.

For 2017-18, CPI inflation average could thus be below 3.5 per cent with a downward bias, the report added.

The retail inflation, which the RBI mainly factors in while deciding interest rate, has declined to historical low of 1.54 per cent in June. The wholesale price inflation for the month too has dropped to eight month low.

reserve bank of india news, banking and finance news, business news, indian express newsIndustry chamber CII is of the view that declining inflation, which has been undershooting the central bank’s inflation target by a large margin, should induce the RBI to resume its rate easing cycle.

CII said it “strongly recommends” a rate cut of 50 basis points in the forthcoming monetary policy to provide a fillip to demand.

Commenting on the retail inflation data, Chief Economic Advisor Arvind Subramanian had said the “paradigm shift” in inflationary process has been missed by all, who have made “systematic inflation forecast error”, apparently referring to the RBI.

In the MPC, RBI Governor Urjit Patel had argued for avoiding “premature policy action” and waiting for more inflation data.

“Incoming data is expected to provide greater clarity on the durability of recent food and non-food disinflation,” he had opined.

One of the MPC members Ravindra Dholakia, however, had advocated a 50 basis point cut in the repo rate, saying several noteworthy developments recently on prices and output fronts warrant a decisive policy action.

Interview with Shardul Shroff: Next 90 days will see some form of action, there will be some revival plans or insolvency

Shardul Shroff, executive chairman of leading law firm Shardul Amarchand Mangaldas & Co, says banks will be able to recover money stuck in top corporate defaulters, something that has not happened over the years. In an interview to The Indian Express, Shroff, who represents lenders in the litigation, said buyers for the assets are waiting in the wings and banks will get to know the realisation — of course with haircuts and after long-drawn proceedings. Edited excerpts:

When will we see the first resolution plan under the Insolvency and Bankruptcy Code (IBC) 2016?

It should have happened by now because we started on December 1, 2016. Six months got over. Normally, in 6 months, some resolution plans should have fructified but I have not seen anything. People are still taking extensions, they want more time to draft etc. So, probably the next 90 days will lead to some form of action in the sense that there will be some revival plans or insolvency.

Do you think the new RBI circular which has deleted the statement that the 12 large defaulter cases should be given priority by NCLT, will slow the process under IBC?

No, because as of now, the pressure of work is less on the tribunal. Today, even without the RBI (the Reserve Bank of India) circular, we were getting dates within a week, sometimes twice a week. It is a new tribunal.
So, it’s not that they are overloaded with work. So, it will make no difference. You must have seen all the matters are coming up for admission.

Will banks now be able to recover debt from these defaulters?

They will get recovery because the banks will get valuation, which has not happened truly over years. Banks will now get to know what will the realisation value be. So, to that extent, you know if it’s to be sold what is the secured creditor going to get, what are the banks really going to get. So the shortfall calculation will be done.

If resolution doesn’t happen in the first several cases, won’t there be disenchantment with the process?

Look at it in a different way. If the instalment or the money that you pay is less than interest, then you are saying that I can’t even pay principal. So, those are going to be troublesome situations because the banks will have to take large haircuts and maybe, even the buyer will want incentives to step in. One leg is cutting down debt and the other is giving new facilities to the buyer because nobody has got this kind of liquidity to go and pick up a steel business.

Let’s say that after the 270 days, there is no option but to wind up a company. In the current market, will we be able to realise something?

My own feeling is that the global situation is such that not much can be done especially steel is in a glut. But according to the banks, they are getting buyers. For instance, Amtek has at least 20 bidders for different parts of its business. So, it depends on the sector I feel.

Are the banks in a position to take a big haircut?

They have no choice. They will have to do it because otherwise, they are facing 100 per cent write-off. They will have a hole in any case.

Are you seeing more debtors taking companies to NCLT rather than the banks?

Debtors are taking companies to NCLT but those are operational debtors. And, operational debtors are really not getting relief. Nobody is winding up a company because an operational debtor has moved court. Winding up process has effectively stalled because of trade loans. The fundamental change which has happened in the company law is that the 1956 Act had a provision that said inability to pay. That’s gone so, today neither under the insolvency Act nor under the old Companies Act do you have a provision for winding up for inability to pay. The differentiation which has now happened is that if you have got a non-performing asset then you have an eligibility to file in NCLT.

Do you see any fund diversion from the 12 defaulter firms?

There could be fund diversion. But as far as I know, all the cases have gone through forensic. There could be cases where there is diversion in that case they will sue the promoters. Sebi has taken it up seriously, the mismatch in NPAs and what is actually provided in the book. Sebi will do an enquiry which will be far more serious than what probably the RBI and banks will do. So, listed companies will be under the scanner.

With the new law in place, how much of it is a difference from a perspective of an investor now to come in as opposed to earlier?

Now, the asset debt mismatch will get rationalised. Because any fund that is going to come in will not come in on as-is basis. Everyone is going to ask for a haircut. And, they will therefore come out with what is the restructured balance sheet in some sense. There will be two theories — is it a good asset or a bad asset, is it a good management or a bad management. On these corners the theory will be tested.

In the background of the new law, there is a completely different wake-up call for Indian promoters. How will things change in coming years?

In a SDR or a S4A, the law now contemplates that the lenders convert part of their loan exposure in a stressed company into equity and own at least 51 per cent. By this, there is no money flow. It’s just an adjustment. But as a result of that, the promoters are getting squeezed out. This is certainly going to raise alarm bells with the original owners. It may drive them because this could result in a takeover.

shardul shroff, Shardul Amarchand Mangaldas, corporate defaulters,loan defaulters, Insolvency and Bankruptcy Code, ibc 2016, banking news, business newsIs there any ambiguity in terms of what is a disputed debt because two different benches of NCLT have defined it differently?

Every debt will be disputed. Let me put it why. Debt would be a balance sheet acknowledgment. Knowing how Indian promoters are, they will always say this is not due. But then the question will be compared with the balance sheet confirmation or the balance confirmation. So, there will be some amount of discovery as to what’s the debt due. What is important is that the tribunal, the NCLT or the resolution professional (RP) is not a judge. So, for him, he is not adjudicating the debt due. His job is to record that there is debt due not what is the debt due. The judging of the debt is only for the purpose of the vote.

Will firms challenge the NCLT order in the Supreme Court?

Who will not challenge it? And, I am glad that there will be challenges because there will be finality then. You must assume that this new law will be in suspense for 2 years because people who will lose their company will not take it lying down. So, people will challenge but I have a feeling that the SC will be against the heavy indebtedness.

Currently, is NCLT equipped to handle such cases?

They are. NCLTs and typically, the Company Law Board were always handling oppression and mismanagement. So, they already have that jurisprudence. For them, noticing mismanagement is not difficult.

But, building of resolution professionals will take time…

Yes, it will, because of many reasons. You tell me what can an individual RP do? If a company has 50 subsidiaries, how will an RP hold it in any case. Or he has got 10 locations, before an RP takes charge of those 10 locations and make an inventory statement, 270 days will be over. So, there will be some amount of flexibility that will be given. For an RP, making an information memorandum will be a herculean task because this is a merchant banking job. Because if you have an unwilling corporate, you will not get any data.

SBI chief Arundhati Bhattacharya earlier said that the ecosystem is not ready for this, what do you think?

I would agree with her. Because what is today ready? People are only appointing a receiver and sitting. So status quo has been maintained but the action which is required for a resolution plan, the detailing that is required , the drafting skill, we have not seen it yet. We have only scratched the surface of the law. We have not reached a position where we have seen a very good scheme being drafted. So it will take time.

142 per cent rise in bad education loans in 3 years

Indian banks have seen a 142 per cent rise in default by students who have taken education loans during the past few years, at a time when hiring for new jobs has slowed down and tech companies have started laying off employees.
State-owned banks, which are already weighed down by huge defaults by corporates, are the worst hit as they account for over 90 per cent of educational loans. Private banks have largely stayed away from this segment.
In the education segment, the total non-performing assets (NPAs), or loans on which borrowers have defaulted on payments for more than the stipulated 90 days, stood at Rs 6,336 crore at the end of December 2016, against Rs 2,615 crore in March 2013, the Reserve Bank of India (RBI) has revealed.

This is 8.76 per cent of the total education loan outstandings of Rs 72,336 crore as of December 2016, against Rs 48,382 crore in March 2013, the RBI said in a reply to an RTI filed by The Indian Express. Public sector banks began to disburse education loans in 2000-01. The concept was pushed the most by former finance minister P Chidambaram when the UPA government was in power.

The rise in bad loans in the education loan segment in 2013-2016 coincided with the Indian industry battling overcapacity, demand slowdown, stalling of new projects and defaults by top corporates. At the same time, the demand for loans was up as educational institutions, especially engineering and management colleges, mushroomed, without a check on quality.

More than half of education loans were taken by applicants in southern states, which have also reported most defaults. Students from Tamil Nadu and Kerala are in the forefront of taking loans, said an official of a nationalised bank.

Experts attribute the rise in defaults to the education scenario, pointing out that various state governments, especially in Andhra Pradesh, Tamil Nadu and Karnataka, have approved setting up of educational institutions without considering the employment potential. “Two reasons for this (defaults). It could be that the students are not getting placed. And with engineers, this is highly possible. Second, they are not getting placed in jobs that they thought they would get placed in,” said Rituparna Chakraborty, president, Indian Staffing Federation.

With investments in new projects not taking off, there is an oversupply of qualified professionals. “Engineering is in a bad scene because most people in India want to become engineers and they thought that irrespective of their specialisation, they would get a job in the IT sector. And IT is not hiring and they are not inclined to hiring… My hope was that ‘Make in India’ would become a success and there would be some job creation, but that’s taking a little bit of time. Apparently there are no takers for engineers. There is an oversupply of engineers. Side by side, quality has also taken a backseat. That’s also impacting their prospects to get hired,” Chakraborty added.

State Bank of India, the largest player in the education loan segment, had disbursed Rs 15,716 crore to students by the end of December 2016. MD, SBI, Rajnish Kumar admitted that there was an NPA problem in the South, but added that they were ready to disburse under the fresh loans guaranteed by the Central government. In 2012, then finance minister Pranab Mukherjee had announced a Credit Guarantee Fund in the Budget to cover loans up to Rs 7.5 lakh without any collateral security and third-party guarantee. Various state governments, including Kerala, had announced their own schemes to repay the loans of students.

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“Overall we are comfortable with the segment,” said Kumar. “We are ensuring the quality aspect also. We have an education scheme for students going abroad… these are all high-value loans. We are open to it. Unlike in the past, we are trying to ensure the quality of the loan.”

Central Bank of India Chairman and MD Rajeev Rishi admitted a problem with recovery earlier, but said things were improving. “In the initial phase when education loans were launched, we faced some problems, but not any longer. There’s no cause for concern. Normally people don’t cheat. They have a full career ahead of them,” Rishi said.

Bankers and financial sector firms say it’s the small-ticket loans which could turn bad. “There are a lot of new colleges and courses which keep coming up in India. Those colleges and courses need to be evaluated for their potential employability before lending. Banks don’t have time to do it and they find it difficult because it’s focused work and research is required. Most of the delinquencies are in the smaller-ticket loans which are being given for Indian courses. It’s directly proportional to the quality of education. If the quality of the course is not good, students will find it difficult to get the right job and right salary. Then it becomes difficult for them to repay loans,” said Prashant Bhonsle, CEO, Education and Housing, Incred Finance.

Banks also often find it difficult to track students who borrow money. “Operationally, after the course, the student gets a job in a different city. So it becomes difficult for the bankers to track the students,” he said.

At the same time, Bhonsle said, educational loans have started attracting new, specialised players. “ A lot of new players are looking at this segment as a large opportunity. They are trying to understand how to underwrite risk… You need to know about the university, college and course… whether they are good or not. You need to innovate and fit the right product to the right student profile, course profile and right parents profile.”

Proceedings under IBC: Bankruptcy filing picks up to deal with mounting bad loans

Within seven months of the final insolvency rules kicking in under the Insolvency and Bankruptcy Code 2016 (IBC), over 237 applications have been filed by financial creditors against defaulting companies for initiating corporate insolvency resolution process and admitted in various benches of the National Company Law Tribunal (NCLT).

According to data analysed till June-end, a total of 129 corporate insolvency applications were admitted with the Mumbai bench of the NCLT, while 58 applications have been filed with three benches of the NCLT in Delhi. Ahmedabad bench of the NCLT accounted for 15 insolvency applications, while seven cases were admitted with the Allahabad bench.

Notwithstanding the focus on 12 large accounts that the Reserve Bank of India (RBI) has advised for being referred for resolution under the IBC, the data from the NCLT benches at 10 locations show the rising pace with which financial creditors and companies are filing for insolvency resolution under the new bankruptcy law that was enacted only last year.

From admission of seven cases under the IBC in January by various NCLT benches, the number has now gone up to 87 in June. On a quarterly basis, 202 cases were admitted in April-June, as compared with 35 in January-March, according to data collated from NCLT benches at 10 locations. The cases have been filed by financial creditors such as banks, asset reconstruction companies, non-banking finance companies as well as companies or corporate debtors themselves.

The 10 NCLT benches are in New Delhi, Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai, with each of these having jurisdiction over multiple states. The 12 troubled companies being referred to NCLT by the RBI — including Jyoti Structures, Bhushan Steel, Monnet Ispat and Electrosteel Steels, Amtek Auto and Era Infra Engineering — account for a combined debt of around Rs 2.5 lakh crore.

As regards the non-performing accounts other than the large 12 cases, the RBI’s internal advisory committee suggested that banks should be required to file for insolvency proceedings under the IBC for these accounts in case banks are unable to agree upon a viable resolution plan within six months. The government is expected to increase the number of NCLT benches in order to deal with enormity of loan default cases, while analysts expect the pace of insolvency applications to gather pace going forward.

Banks to settle Rs `4,00,000 crore Debt

Banks are likely to take a haircut of 60 per cent, worth Rs 2,40,000 crore, to settle 50 large stressed assets with debt of Rs 4,00,000 crore, rating agency Crisil has said. These 50 companies are from the metals (30 per cent of total debt), construction (25 per cent) and power (15 per cent) sectors, and account for half of the Rs 8 lakh crore non-performing assets (NPAs) in the banking system as on March 31, 2017.

In banking parlance, haircut is the difference between the market value of an asset used as loan collateral and the amount of the loan. The amount of the haircut reflects the lender’s perceived risk of loss from the asset falling in value or being sold in a fire sale. Banks have already provisioned for 40 per cent of this exposure. “We used the economic value approach to assess the haircuts,” said Pawan Agrawal, chief analytical officer, Crisil Ratings. “This is a combination of market value multiples and cash flow estimation. The final haircut, however, will also be influenced by the expectation of lenders, valuation of subsidiaries, and the price outlook for commodity-linked sectors.”
It has classified the haircuts into four categories — marginal (less than 25 per cent), moderate (25-50 per cent), aggressive (50-75 per cent), and deep (greater than 75 per cent). A quarter of the debt analysed needs marginal or moderate haircuts, while a third needs aggressive, and nearly 40 per cent deep haircuts. “Companies from the power sector would require moderate haircuts, while those from the metals and construction sectors would need aggressive ones,” Agrawal said.

In the metals sector, the aggressive haircut would be Rs 1,13,000 crore and deep haircut Rs 12,000 crore. In the power sector, marginal/ moderate haircut would be Rs 37,000 crore, aggressive Rs 19,000 crore and deep haircut Rs 12,000 crore. For construction, deep haircut would be Rs 78,000 crore, moderate haircut of Rs 23,000 crore and aggressive Rs 5,000 crore.

banks news, banking and finance news, business news, indian express newsThe sources of stress are policy or demand (power plants), lower capacity utilisation (steel plants), and over-leveraged balance sheets (construction companies). The restructuring tools facilitated by the Reserve Bank of India (RBI) that the indebted companies had availed of earlier did not help because of very high debt levels that underscore the magnitude of stress, it said.

The government recently promulgated an ordinance empowering the RBI to issue directives for faster and optimum resolution of stressed assets so that they become viable. Majority of the debt requiring deep haircuts belong to companies with unsustainable businesses so asset sales are necessary to recover monies. Ramesh Karunakaran, director, Crisil Ratings said, “Some of these assets offer M&A opportunities for companies with strong credit profiles. Also, potential synergies could allow for a significant reduction in haircut – an aspect that has not been considered in our analysis.”

It would be in the larger interest of the economy to pop the bitter pill of haircut than kick the can down the road, it said.

Given the issues faced by many of the companies, the haircut required may be on the aggressive side. The haircut levels may be further impacted by the fact that a large number of stressed assets may be put on the block by lenders, making it effectively a buyer’s market.

Non-performing assets: ‘Actions by RBI, government to mitigate bad loans by 2019’

The stressed assets problem plaguing Indian banking system is well documented. Gross non-performing asset (NPA) ratio for banks is at their peak and the problem seems to show no signs of abating. The question to ask in such a scenario is how big the actual problem is and what does it entail for the banks? To give an estimate, there are nearly Rs 12 lakh crore of stressed assets in the country’s banking system.

These constitute nearly 15 per cent of the outstanding loan books of these banks. Of this, banks have already sold around Rs 2 lakh crore worth of such loans to asset reconstruction companies (ARCs), leaving about Rs 10 lakh crore on their own books. Taking the past experience into account, nearly 35 per cent or Rs 3.5 lakh crore of the Rs 10 lakh crore will eventually need to be marked down by banks in the form of provisions and write-offs.

These numbers reflect a massive problem which requires a concerted and strong response. The Reserve Bank of India (RBI) and the government have gone about solving this in a very phased and planned manner. They have identified that the problem is of gigantic proportions and a one-shot resolution would serve no purpose and could potentially yield disastrous consequences. The response has evolved over the couple of years through a variety of steps, each designated to further push towards a clean-up in the banking system.

Asset quality review

The process started in 2015, with the AQR undertaken by the RBI. This pushed the banks towards transparency in recognition and classification of NPAs across the board. While this resulted in significant provisioning by banks and decline in profitability, it also established a clear picture of the nature of problem faced by the banks. The good news is that banks have already provisioned Rs 2 lakh crore of the Rs 3.5 lakh crore markdown they are expected to take on their stressed loans. Effectively, more than half the markdown is already over. Additionally, banks are now providing around Rs 35,000-40,000 crore every quarter. Usually, it takes 3-5 years for the provisioning and ‘real value’ to catch up. So, the required provisioning should be complete in another 4-5 quarters. This will effectively complete Phase-I where the mark to market for these stressed loans will be accomplished.

RBI, modi government, loans, bank loans, latest news, business newsRestructuring and NCLT

With the provisioning requirements almost taken care of, the time is now opportune for banks to aggressively get into restructuring mode. The economy, global as well as Indian, is also on an uptick, creating an amenable environment for promoters to agree to reasonable restructuring terms. This is because promoters also now see the potential of an upside in case the restructuring works out. This is in contrast to a couple of years ago when the relatively weaker growth meant that the promoters could afford to wait and drive a harder bargain as restructuring presented no viable benefits for them.

In such a scenario, the RBI direction on referring companies to the National Companies Law Tribunal (NCLT) could push the NPA clean-up process into its end-game. While the modalities to this are being worked out, the process has already been initiated for a few cases. Assuming most cases will be referred to the NCLT by October 2017, we could expect most resolutions/ restructurings to be in place by June 2018.

What next?

According to our estimates, more than 70 per cent of these cases will be restructuring and resolutions wherein the debt will be written down to sustainable levels. Banks will take equity positions in these companies and new investors will provide additional capital. These companies would be then run with higher governance oversight and stricter loan covenants. As banks will take debt haircuts, promoters will take significant equity haircuts and new investors will ensure better management of these companies going forward. Capital allocation and efficiency will be the key for these companies as they try to tread back the path to normalcy. We estimate that around Rs 40,000-50,000 crore of new additional capital will have to be infused to make these companies perform efficiently again. This will be infused by a mixture of existing promoters, ARCs, stressed asset funds and private equity (PE) investors. These investors will also drive the turnaround for these companies through stronger oversight.

Starting afresh

Driven by the strengthening economy and pushed by the government, regulators, banks and capital providers, we expect the bad loan situation to be significantly mitigated by 2019. The economy can then look forward to a fresh capital expenditure cycle. Coupled with strong consumption & savings, continued seminal reforms like the goods and services tax and aided by the continued trend of global capital flows, we can expect to see the Indian economy firing on all cylinders in the next few years.