Operation NPAs

Will the most ambitious attempt be actually successful?

The RBI has embarked upon one of the most aggressive phases of NPA management. It has actually attacked the NPA problem simultaneously at two levels. Firstly, at the banking level, the Prompt Corrective Action (PCA) has been initiated against banks that have net NPAs beyond a certain threshold. The PCA will entail granular scrutiny of operations, restrictions on dividend payout, limits on recruitment and employee compensation, bar on branch expansion etc.

At another level, the RBI is addressing the NPA problem at the level of the defaulting company via the Insolvency and Bankruptcy Code (IBC). The IBC offers defaulting companies a period of 180 days (extendable to a maximum of 270 days) for finding a resolution with their creditors. If that is not possible, the RBI will refer the defaulting company for liquidation. Both the PCA and the IBC have attacked at the core of the NPA problem. The question is whether it will be successful in practice?

Need a secondary market…

That is going to be the biggest challenge for the banks. Most of the financing has been raised by these companies against their plant and machinery as well as their rolling stock. For example, with steel companies being among the key defaulters in the current scenario, there could be a glut of steel capacity in the market. If there are not too many willing takers, then the asset may have to sold through a distress sale, which will further impair the recovery rights of the bank. The entire process will have to done very discreetly on a B2B basis. RBI has to be cautious about a glut of capacity supply.

 What is the quality of underlying…

The bankers had a nasty experience in the case of Kingfisher Airlines wherein the company had hypothecated intangible assets like brands and trademarks with the banks, which almost became worthless on the company being forced out of business. That could be the case with many borrowers and the actual position will only be known once the bank initiates action to protect the value of the underlying assets.

Resolution is the answer…

The real answer to the problem of NPAs will be resolution. If it entails a haircut and an impairment in the bank balance sheet, it would be worth the while. Fortunately, India is today standing on the cusp of a revival in growth. With companies looking to expand capacity in key sectors like steel, power and infrastructure, there will be interest from competitors, P/E funds and distressed asset buyers. That will not only protect the assets but also the economic environment. That is exactly what the RBI and banks should strive for! ©

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