What’s in store for Indian public bank’s stressed assets?
The stressed assets in Indian financial system have reached to an extent where it cannot be ignored anymore. The government has on numerous occasions treated state-run banks as the line of credit for their populist measures. The amount of bad assets accumulated in the state run banks did not happen overnight, nor was it part of a grand scheme that went wrong.
Over the years, Non-Performing Assets (NPA) have grown exponentially. According to Reserve Bank of India (RBI), in March 2012, the bad debts stood at Rs 15,551 crore which has shot up to Rs 52,542 by March 2015. Between the financial years of 2013 and 2015, 29 nationalized and state-owned banks have written off bad bets of a total of Rs 1.14 lakh crore in total. This is turning into a nightmare for the whole banking sector and threatens to adversely affect the country’s economy.
It was estimated by a daily that in December 2016, the public sector banks were holding close to Rs 7 lakh crore worth of stressed assets which include the NPAs and restructured loans. The government after the fair success of “GST bill” is now looking to clean up this mess. The finance minister had also allocated Rs 10,000 crore towards this effort in his Budget speech this February.
Recently, the RBI deputy governor Viral Acharya floated a proposal to restructure the stressed assets in a radical fashion. According to this proposal, the banks would be asked to resolve 50 of the most stressed assets by the end of this year. To help them, specialist turnaround private investors and asset restructuring companies will be called in. In cases where a particular bank’s stressed assets do not have a huge impact on its operations, an appropriate waiver or haircut may be considered.
Acharya has also suggested about setting up of a national asset management company to oversee this and future turnarounds of stressed assets. For certain sectors which are asset heavy like power and steel projects which have failed will issue debt from the public which will be government guaranteed. The money raised will be used to bring the projects back on track or else make them attractive enough to be sold off. There are talks of having a provision to convert the debt funds raised into equity after certain milestones.
Since the outbreak of this news on Friday by the finance minister Arun Jaitley, the markets have seen a huge spike in the stock prices. For instance, OBC bank stock had gone up by over 6.6% on Friday which holds an approximately 10 % bad loans on their loan books. Same is the case with Bank of India which gained 5.2% on Friday which holds around 7% bad loans. Overall, the Nifty PSU bank index went up by 3.3% on that day.
There are institutions in India like the CDR (Corporate Debt Restructuring) and SDR (Strategic Debt Restructuring) and the S4A provision by RBI, which look into troubled companies. Now they help bankrupt organizations return to financial health through special grants or corporate and debt restructuring measures. The public banks when approached the CDR only gave them a two-year interest and principal moratorium. This only helped them in extending matter as if all was ok. But in reality, the bad loans were still sitting on the books.
Now, the problem with these institutions is that they are already burdened with the corporate failures of every sector in India. Hence, they are not specialized in bad loans which are crippling the public banks. To add to it, the sheer size of this issue is too large for the CDR and SDR to focus on. It makes much more sense to focus on this problem separately and bring in experts from the private financial institutions.
Moving ahead with these steps, one important consideration to be kept in mind is the risk factor that the government would be taking. In other words, the cost of restructuring. In case the turnaround of assets fail, it should not massively deter the stock markets or the average tax payer. There is a lot of faith in the financial system of this country which is considered robust, withstanding the 2008 credit crisis. In executing this plan, there should not be a long term negative repercussions which may pose a threat to the Indian economy.
Currently, all the state-run banks, the Finance Ministry officials along with other stakeholders like RBI and private fund managers are contemplating on similar proposals. There are multiple lines of thought that are being explored and it still remains to be seen how effective would these provisions be. The public sector banks are the backbone of the financial system in this country and it’s imperative that they remain healthy. The final plan of action is expected to be released around the end of April or early May. This way, everyone gets a complete financial year for the restructuring activities to show its result.
About the Author:
This article has been submitted by Anjan Kumar Merkap.