PSBs: Menace of Stressed Assets

In recent times, much is being talked about the stressed assets of banks, particularly of the Public Sector Banks (PSBs) by everyone. Although the phenomenon of growing Non-Performing Assets (NPAs) is not all that new to  commercial banks, this new-found sense of urgency to find a quick resolution must however be welcomed. For, it is said that ever since the Reserve Bank of India (RBI) undertook Asset Quality Review of banks in 2015, the position has so deteriorated that today it appears that around “a sixth of PSBs’ gross advances are stressed and a significant majority of these are in fact non-performing assets.” And, amongst the worst affected banks, the share of the NPAs is reported to be exceeding 20%—indeed, alarming for the nation as a whole.

But the irony is: despite a plethora of resolution mechanisms and frameworks such as Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR), and Scheme for Sustainable Structuring of Stressed Assets (S4A), offered by the regulator, relatively little has been achieved in resolving the crisis. And the reasons for such a poor outcome are not far to seek: one, there are no incentives for banks to go the whole hog for keeping the bad debts at a manageable level. It is needless to say here that it is only such a bank which fears that its mounting bad debts would drive away its depositors or would be castigated by its shareholders tends to recognize bad debts well in time and importantly ensure corrective action to arrest losses. But this market discipline is something not known to our banking system. Two, there is, on the other hand, a counter-incentive claimed to be holding back banks from taking timely decisions in terms of accepting realistic haircuts to close stressed accounts, fearing unpleasant questioning from vigilance agencies, etc. Three, much of the current NPA buildup is mostly out of the loans granted en masse by banks immediately after the 2008 global recession—obviously, at the behest of the policy guidelines issued by the government—to a few set of large firms engaged in infrastructure, power, telecom, metals and textiles, that too within a short period of 2009-2012. Four, the size of such stressed assets being so high, there are hardly any such matching Asset Reconstruction Companies (ARCs) that could pump in huge capital to turn around these assets.

It is against this backdrop that the Central Government has recently introduced an ordinance that empowers it to authorize the RBI to act on NPAs of banks, as though there is no such provision already in existence. Under this provision, RBI will advise banks about the need to resolve bad debts issue by initiating action under Insolvency and Bankruptcy Code (IBC) via expert committees appointed by it. Encouragingly, RBI has already cracked its whip: It has already directed the lending banks to initiate insolvency proceedings against 12 corporate borrowers, each owning to Banks in excess of Rs 5000 crore.

Nevertheless, shifting of the responsibility from lending banks to a regulator may not yield the desired result, for what the resolution of bad debts calls for is: profit-driven approach, which if at all exists, rests with the very Lending Bank. A lender is better equipped to rationally arrive at the Net Present Value of the assets under dispute and decide whether to go for a cash settlement offered by the defaulting borrower right now or to take the route of IBC that is plagued with uncertainties. Thus, it is a process of commercial decision making which essentially rests on the speculative view of the decision maker about the future outcomes:

• What kind of bids can be expected through IBC route? 
• How much money can be realized and importantly, when?
• How much discount can we accept under the present cash offer vis-à-vis the realizable amount through IBC, given its attached uncertainties?
• Which risky path to be taken?

Therefore, the issue of resolving bad debts needs to be backed by ‘profit-motivated’ approach and this is seldom available with the bureaucracy. Indeed, it is the very creeping in of this bureaucracy into the banking system that allowed this malady to grow to alarming proportions. That being the reality, what the disease needs is not micro-management by regulators but motivating banks to take bold decisions, assuring them that the system would recognize the difference between honest mistakes, maladministration and corruption. Simply put, good administration and creation of special institutions that can turn around the stressed assets with the required capital and expertise is what is needed to cure the malady.