Do Banks Really Want To Improve Their Balance Sheets?     (06-Mar-2017 )

In three week's time, the Financial Year (FY) 2016-17 will end.

If you speak to anyone working in the accounts department of a big company, especially a bank, he/she will tell you how hectic it gets as the fiscal year-end approaches.

Preparing financial statements for the whole year and tallying the balance-sheet is much a bigger task than it appears.

For banks, it’s not only a big task but a very complicated and painful one as well, considering the asset quality issues they are facing at the moment.

By now, even the most reluctant investor knows that banks are struggling to offload stressed assets from their balance sheets. Loan recovery remains the worst challenge and making provisions for Non-Performing Assets (NPAs) has been denting profits. Flat credit growth and even thinner profit growth is choking banks.

Finding themselves beset from all sides, they have approached RBI for relief. In their latest communication, they have sought some relaxation in guidelines governing the debt recast schemes. The RBI has floated three restructuring schemes till date: Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR), and Sustainable Structuring of Stressed Assets (SA).

All of them have achieved no real success in curtailing the asset quality issues in the corporate loan book.

Banks believe stringent rules of restructuring have hindered these schemes from taking off.

What are the new demands banks have of the RBI?

  • To relax the provisioning norms further and allow them to spread provisioning on big-ticket loans over 8 quarters.
  • To loosen up guidelines that require banks to seek personal guarantees from the promoters of the stressed and debt-laden companies.
  • To review rules about the conversion of debt into equity as a part of debt restructuring scheme.
  • They also seek more powers and higher representation on the boards of companies opting for debt recast schemes.
  • Many bankers are of the view that, such assurances shall be sought only when there’s a change in the management or in the promoter holding.

Bankers believe unless these changes are allowed, there’s a little scope to achieve any meaningful success on the debt recast front even in the future.

Mr Dinesh Kumar Khara—Managing Director of India’s largest bank, SBI told media that,  "Wherever resolution is being attempted, some kind of incentivisation from RBI in terms of NPA (non-performing assets) recognition date of March 31, 2017, or in terms of provisions should be given. If this relaxation can be given, banks will be encouraged for faster resolution." 

What this picture entails?

It means, a speedy resolution of NPAs is possible only with less stringent norms.

However, this raises another question—how prepared are the banks to absorb the losses?

Capital infusion, recovery through auctioning off assets held as security and selling unrealizable stressed assets to Asset Restructuring Companies (ARCs) are the crucial aspects of dealing with the issue.

At present, the banks are struggling on all fronts, especially the public sector banks, have wasted opportunities to infuse capital by way of rights.

Discovery of a fair price to sell the stressed assets to ARCs is another problem. They haven’t shown any inclination to sell assets at deep discounts.

As far as the auctioning of collateral securities is concerned, there’s trouble here as well.

Believe it or not, there are no bidders for the Mr Vijay Mallya’s properties in the auction. He is a wilful defaulter. This should concern banks. Are corporates united among themselves to save one another? The arrest of a few officials is not a sufficiently bitter lesson to prohibit the corporations from indulging in “you scratch my back, I’ll scratch yours” (mal)practices.

As you may know, many companies don’t generate enough cash to service even the interest portion of their debt. This hints at the magnitude and the complexity of the problem.  

Shall banks demonstrate the courage to take a hit once and for all to dissolve stressed assets?

Well, that requires courage. And they are reluctant to gulp the poison of bad loans.

What’s the way out?

Good question.

In consultation with the Government, the RBI’s deputy Governor, Mr Viral Acharya, has been trying to find out a solution,

Will he be successful? Well, that's a development worth tracking.

For now you may conclude that, banks are trying to save their skin.

For promising investment ideas to achieve your financial goals, reach out to a Certified Financial Guardian.

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