34 power projects among loan defaulters

34 power projects among loan defaulters

Context:

Finance Ministry refuses to give names to Parliamentary committee looking into NPAs

Introduction:

• The Finance Ministry refused to list out 34 power projects that defaulted on bank loans worth crores of rupees to a parliamentary panel on Energy recently.
• The Standing Committee on Energy, which was discussing non-performing assets (NPA) in the power sector, hauled the government over coals for the “casual” briefing by officials of the Department of Financial Services, the RBI and the banks that financed these power projects.
• Earlier, the Reserve Bank of India had refused to divulge the names of the loan defaulters.
• Last year, in connection with a PIL petition filed by the NGO, the Centre for Public Interest Litigation, the Reserve Bank of India had submitted a list of 57 defaulters who owe banks Rs 85000 crore , in a sealed cover to the Supreme Court.
• The RBI, in May this year, again refused to entertain an RTI application demanding the names of loan defaulters.
• At previous meeting of the committee, the Department of Financial Services had said that at least 34 power projects came under the category of non-performing assets.
• The Standing Committee has now asked the officials to bring in the list at the next meeting.

About Parliamentary committees:

• The Parliamentary committees are established to study and deal with various matters that cannot be directly handled by the legislature due to their volume.
• They monitor the functioning of the executive branch.
• The Parliamentary committees are of two kinds- Standing Committees and Ad hoc Committees. The former are created on an adhoc basis as the need arises and they are dissolved after they complete the task assigned to them.
• Standing   committees is a committee consisting of Members of Parliament. It is a permanent and regular committee which is constituted from time to time according to the provisions of an Act of Parliament or Rules of Procedure and Conduct of Business.  These standing committees are elected or appointed every year, or periodically by the Chairman of the Rajya Sabha or the Speaker of the Lok Sabha or as a result of consultation between them.

What are Non-Performing Assets?

• A loan or lease that is not meeting its stated principal and interest payments.
• A loan is an asset for a bank as the interest payments and the repayment of the principal amount create a stream of cash flows.
• Banks usually treat assets as non-performing if they are not serviced for some time. If payment has not been made as of its due date then the loan gets classified as past due.
• Once a payment becomes really late the loan gets classified as non-performing. A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

Types of NPA’s:

Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets:-

• Substandard assets: An assets which has remained NPA for a period less than or equal to 12 months.
• Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
• Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

What are the reasons for growth?

1-      Governance Issues:

• Diversion of funds by companies for purposes other than for which loans were taken.
• Due diligence not done in initial disbursement of loans.
• Inefficiencies in post disbursement monitoring of the problem.
• Restructuring of loans done by banks earlier to avoid provisioning.  Post crackdown by RBI, banks are forced to clear their asset books  which has led to sudden spurt in NPAs
• During the time of economic boom, overt optimism shown by corporates was taken on face value by banks and adequate background check was not done in advancing loan
• In the absence of adequate governance mechanism, double leveraging by corporates, as pointed out by RBI’s Financial Stability Report.

2-   Economic Reasons

• Economic downturn seen since 2008 has been a reason for increasing bad loan.
• Global demand is still low due to which exports across all sector has shown a declining trend for a long.
• In the case of sectors like electricity, the poor financial condition of most SEBs is the problem; in areas like steel, the collapse in global prices suggests that a lot more loans will get stressed in the months ahead.
• Economic Survey 2015 mentioned over leveraging by corporate as one of the reasons behind rising bad loan.
• Another factor that can contribute to the low level of expertise in many big public sector banks is the constant rotation of duties among officers and the apparent lack of training in lending principles for the loan officers
• Poor recovery and use of coercive techniques by banks in recovering loans

3-   Political reasons

•  Policy Paralysis seen during the previous government  affected several PPP projects and key economic decisions were delayed which affected the macroeconomic stability leading to poorer corporate performance.
• Crony capitalism is also to be blamed.
• Under political pressure banks are compelled to provide loans for certain sectors which are mostly stressed.

4-   Resolution issues

• In the absence of a proper bankruptcy law, corporate faced exit barriers which led to piling up of bad loans
• Corporates often take the legal route which is time consuming leading to problems for the banks

Impacts of NPAs:

• The higher is the amount of non-performing assets (NPA)  the weaker will be the bank’s revenue stream.
• Indian Banking sector has been facing the NPA issue due to the mismanagement in the loan distribution carried by the Public sector banks.
• As the NPAs of the banks will rise, it will bring a scarcity of funds in the Indian security markets. Few banks will be willing to lend if they are not sure of the recovery of their money.
• The shareholders of the banks will lose of money as banks themselves will find it tough to survive in the market.
• This will lead to a crisis situation in the market.
• The price of loans, interest rates will shoot up badly. Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
• It will also impact the retail consumers, who will have to shell out a higher interest rate for a loan.
• All these factors hurt the overall demand in the Indian economy.
• Finally, it will lead to lower growth and higher inflation because of the higher cost of capital.

Suggestions by RBI to tackle NPA:

• Banks need to be more conventional in yielding loans to sectors that have a history of being found as contributors in NPAs.
• The loan sanctioning process of banks needs to be harsher and well beyond the conventional practices of analysis of financial statements and history of promoters.
• A suitable agenda to attract and reassure quality professionals to join the discipline of insolvency professionals is vital.
• Any plan to alleviate the current scenario especially relating to the Debt recovery tribunals must be given urgency, to ease the burden on NCLT
• If the public sector has to compete in the fierce financial markets, they have to create and nurture a good cadre of officers in various disciplines.
• As per the RBI directive, banks will now have to agree to a common approach for restructuring or recovery of each non-performing loan (NPL).
• The common approach will be the one adopted by the lead bank, along with a few more banks so as to meet the thresholds of 60% of lenders by value and 50% by number.
• This approach assumes that the interests of all banks need to be aligned with or subsumed within the interest of the lead bank.
• There is an urgent need to develop specialized skills in the area of appraisal, monitoring and recovery to ensure the quality of credit portfolio.
• Banks should be equipped with latest credit risk management techniques to protect the bank funds and minimize insolvency issues.
• Banks should explore the possibilities to develop credit derivative markets to avoid these risks.
• Timely follow up is the key to keep the quality of assets intact and enables the bank to recover the interest/installments in time.
• Selection of right borrowers, viable economic activity, adequate finance and timely disbursement, end use of funds and timely recovery of loans should be the focus areas so as to prevent or minimize the incidence of fresh NPAs.

Government initiatives to tackle NPAs:

1-   Promulgation of Banking Regulation (Amendment) Ordinance: It helps in the following ways:

• It empowers the RBI to direct Banks to initiate insolvency resolution, wherever such need arises.
• It also give advise to baking agencies on ways of tackling with its stressed asset problems.
• It aims to check this menace in a time bound manner and helps in timely recovery of the stressed assets.

2-   Incorporation of SARFAESI ACT: The Securitization and Reconstruction of Financial assets and Enforcement of Security Interest Act 2002 empowers the banking systems to auction residential or commercial properties (except agricultural land) to recover their loans.

3-      Debt Recovery Acts: These laws established debt recovery tribunals with the power to recover debts of Banks and Financial Institutions.

4-      Concept of Bad Banks: In this concept the banking institutions sell their bad loans to an intermediary and thus they write off their bad loan and intermediary has to recover the loan from the defaulter.

5-   Mediation for loan recovery: This concept was introduced so that genuine defaulter, who are unable to pay off their loans, but are not able to put forward their situations with the banking authorities, hire a mediator, who discusses this with the banking officer and come to a solution.

6-   Strategic Debt Restructuring (SDR): Creditors could take over the assets of the firms and sell them to new owners.

7-   Sustainable Structuring of Stressed Assets (S4A): An independent agency hired by the banks will decide on how much of the stressed debt of a company is sustainable

8-      The government recently passed an ordinance to amend certain sections of the Banking Regulation Act, 1949: This allow the banking companies to resolve the issue related to stressed assets by initiating the insolvency proceedings whenever required. This is in addition to the recently promulgated  Insolvency and Bankruptcy Code, 2016 which provides for time bound resolutions of stressed assets.

9-      Government promulgated the Banking Regulation(Amendment) Ordinance, 2017 with the following features:

• It was passed to deal with stressed assets, particularly those in consortium or multiple banking arrangements.
• It authorize the RBI to direct banking companies to resolve the issue related to specific stressed assets, by initiating insolvency resolution process wherever required.