YEAR IN REVIEW: BANKING. Keeping the light at the end of bad loans tunnel burning

As we welcome 2018, the importance of the past year in building a strong foundation for the Indian economy cannot be over emphasised. On the back of bold policy reform measures, India continues to be one of the few bright spots in the world economy and, given its structural strengths, the trend is likely to continue over the mid to long term.

In addition to consumption, the firing-up of the second economic engine — private investments — would require enhanced credit flow and finance in the system. The immediate restoration of the health of the banking sector, which has been facing some asset quality concerns, therefore becomes a top priority. The government and the regulator have taken a slew of decisive measures in this direction.

A critical move in this regard was the recommendation of cases to the NCLT under the newly instituted Insolvency & Bankruptcy Code (IBC) by the RBI. It was a master-stroke in fast-tracking identification and subsequent resolution of the set of 12 companies that comprised 25 per cent of current GNPAs of the banking system.

However, the process can be made more effective with modifications I suggest below:

The RBI has formed an Internal Advisory Committee (IAC) for cases that may be considered under the IBC. The IAC arrived at an objective, non-discretionary criterion — accounts referred would be the ones with fund and non-fund based outstanding amount greater than ₹5,000 crore, with 60 per cent or more classified as non-performing by banks as of March 31, 2016. Considering the government’s focus on core infrastructure, I believe it may be prudent to consider performance improvement of underlying industries over the past 18 months also as one of the objective criteria to consider case referencing. This would significantly ease reviving companies’ stress and lead to containment of higher losses for banks.

The number of cases being filed under IBC has increased significantly and is expected to increase. Hence, augmenting the strength of the NCLT/NCL benches with professionals having requisite skills would be a critical step to empower them to address the increased volume of cases referred under IBC, as well as to ensure adherence to the resolution timelines.

The Centre may allow bank financing for domestic M&A of companies with good underlying assets but under financial stress due to endogenous or exogenous factors. Current regulations preclude such financing, except in the infrastructure sector. Capital market exposure must also be precluded.

First time adoption of International Financial Reporting Standards (IFRS) will result in a $25-billion adjustment in networth of banks , with a $20-billion impact for PSUs. As such, IndAS implementation could be suitably deferred till April 2020.

I wish to reiterate the tremendous effort of the government and RBI in ushering in a much desired insolvency law in the country. As step two, we need to ensure the momentum is not disrupted.

(The writer is MD & CEO, YES Bank, and Chairman, YES Global Institute)