Expressing concern at the persistently high gross non-performing asset (GNPA) ratios in the banking system in the past few years, Reserve Bank of India Governor Urjit Patel on Saturday said public sector banks (PSBs) will need to take haircuts on current exposures under any resolution plan agreed within or outside the Insolvency and Bankruptcy Code (IBC).
Given that higher provision on account of stressed assets as well as other factors will affect the capital position of several (public sector) banks, Patel said this would necessitate higher recapitalisation of these banks. The government and RBI are in dialogue to prepare a package of measures to enable the banks to shore up requisite capital in a time-bound manner.
“The GNPA ratio of the banking system at 9.6 per cent and stressed advances ratio at 12 per cent as of March-end 2017 on the back of persistently high ratios in the past few years is indeed a matter of concern. 86.5 per cent of the GNPAs are accounted for by large borrowers, who have taken loans of Rs 5 crore and above,” said the Governor at a conclave on IBC organised by the Confederation of Indian Industry.
Patel observed that the regulatory challenge will be the economic challenge in dealing with the issue that is accentuated when seen against the capital position of some of the banks, particularly in the public sector. Swift, time-bound resolution or liquidation of stressed assets will be critical for repairing the bank balance sheets and for efficient reallocation of capital.
The sense of urgency imbued in the measures to address stressed assets is reflective of a strong intent to not allow things to drag any further, the Governor said, adding that the recent measures address two key lacunae in the earlier framework -- one, the absence of a hard-coded time-bound period for resolution and two, the agency and co-ordination failures at banks and JLF in pushing through viable restructuring plans.
He underscored that the IBC, in essence, provides for a single window, time-bound process for resolution of an asset with an explicit emphasis on promotion of enterpreneurship, maximisation of value of assets, and balancing the interests of all stakeholders.
Patel elaborated that for a creditor, an asset, in most cases, is more valuable when it is a going concern and generates adequate cash flow as compared to an asset under liquidation. The IBC puts a time limit of 180 days, extendable by a further 90 days, within which creditors have to agree to a resolution plan failing which the adjudicating authority under the law will pass a liquidation order on the insolvent company.
So, the threat of liquidation, which could potentially result in larger losses for creditors as a whole, should be sufficient incentive for them to ensure efficient coordination during the insolvency resolution period so as to quickly arrive at a decision, said Patel.
For the promoter, the Governor felt that the biggest cost of being pushed under IBC is the possibility of losing the firm to potential bidders. This should incentivise the firms to avoid defaults and overborrow in the first place. This will improve, ex-ante, the credit culture in the country.
He emphasised that weak credit discipline in banks, right from the appraisal to sanction stage, is one of the main non-systematic factors in the build-up of stressed assets.
The success and credibility of all the asset resolution efforts would be critically contingent on the strength of public sector bank balance sheets to absorb the costs (haircuts).
“It is clear that PSBs will need to take haircuts on current exposures under any resolution plan agreed within or outside the IBC. Higher provision on this count as well as other factors will affect the capital position of several banks. This would necessitate a higher recapitalisation of these banks,” said Patel.
To shore up banks’ capital measures would include a combination of capital raising from the market, dilution of government holding, additional capital infusion by government, mergers based on strategic fit and sale of non-core assets.