Internal processes in banks have still not caught up with the changes in the external environment relating to the recovery of non-performing loans, said Ashesh Shah, Managing Director, Trans-Continental Capital Advisors Pvt Ltd.

In a conversation with BusinessLine , he said that the IBC framework required a change in the mindset of banks.

“They need to get their ‘origination’ right,” he said. “There are usually enough warning signals for a considerable period of time before an account turns non-performing,” he said.

“There are ratios that provide an indication of the troubles being faced. Banks need to have their loan agreements and covenants much more refined than what prevails currently,” said Shah.

Other regions

Recounting his experience of insolvency and bankruptcy proceedings in other geographies, Shah said that banks there have the right to demand a sale or trigger default if there is a deterioration in certain ratios. And there have seldom been haircuts for banks on such loans, he said. Shah said that banks need to figure out where they were in the lending cycle – especially when financing cyclical industries such as aviation, telecom and steel.

This, combined with good origination, documentation, legal framework, regular monitoring and an action plan, would go a long way in avoiding similar distress in future.

Referring to the recent amendments that allowed home loan buyers being treated as ‘financial creditors’, Shah pointed out that it was a mixed blessing.

Unsecured creditors

He said that ‘unsecured creditors’ will sit on the same platform as secured creditors.

And he cautioned against falling into the trap of populism of painting all developers as delinquent.

He anticipated that one of the repercussions of the new measure would be a drop in the direct lending to developers by banks and housing companies.

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