Recently, the RBI had instructed all banks having exposures to IL&FS group to make provisions for their exposure to the IL&FS group. Indian banks have lent close to Rs.97,000 crore ($14 billion) to the IL&FS group and it is not clear how much of that is recoverable. As a special case, since the group was under government sponsored restructuring, the NCLT had exempted the banks from making provisions for these exposures. However, the RBI had expressed its disappointment as it did not reveal the true picture of the asset quality of the banks. But, how big is the problem?
It was only when Yes Bank made a big provision for its exposure to IL&FS and Jet Airways that the real size of the problem is beginning to dawn. Some of the IL&FS subsidiaries are said to be able to recover only 10-15% of the total outstanding amounts. That would leave a huge hole of Rs.85,000 crore in the balance sheets of banks. The irony is that the entire IL&FS issue is currently shrouded in secrecy. Banks are yet to make provisions for IL&FS but the prospects of recovering anything from these loans is gradually fading. Most of the funds are supposed to be lent and then routed back and there has been little progress in seriously interrogating the erstwhile management of IL&FS which had been playing ducks and drakes with public money. Ducking the issue hardly solves the problem!
Now for phase 2 of NPAs
The banks and the NCLT have surely had some success in the first phase of bankruptcy resolution. These were industrial companies with solid assets on the ground and they did have ready takers. The problem in phase 2 is a lot more complex. These are companies like Jet, IL&FS and Essel where the money trail is yet to be established. In most cases they have been done via complex layers of companies and no assets created on the ground. A traditional NCLT approach may recover nothing as most of the assets on the balance sheet could be either fictitious or wasting assets. We have only scratched the surface of the second phase and it promises to be a lot more complicated compared to the first phase of NCLT!
Some transparency please!
The RBI is absolutely right in asking for more transparency from banks. The second round of NCLT could be a lot more complicated and the recovery ratios could be much lower. As RBI rightly put it, the best banks can do is to give a clear picture of stressed assets rather than offer any surprises at a later date. In an effort to spruce up the balance sheets, banks have been going slow on writing off stressed debt. That is a lot like going back to square one. RBI should be the sole arbiter of how banks present asset quality and the NCLT should ideally stay out of it! ©