Under the watchful eyes of five wise men, who know the industry well, banks will not find it easy to hoodwink the system, says Tamal Bandyopadhyay.
None could miss the collective sigh of relief from the bankers' community on the Reserve Bank of India's decision to open a restructuring window for stressed loans.
Those accounts, which had been in default for not more than 30 days as on March 1, 2020, can be restructured if the borrowers are unable to service them because of their businesses being affected by the COVID-19 pandemic.
The loans can be restructured, among others, by funding interest, converting part of debt into equity and giving the borrowers more time to pay up.
The banks must disclose such recast and set aside 10 per cent of the exposure to make provision for the restructured loans.
In June 2019, the RBI had framed norms for loan restructuring, making it mandatory for banks to treat restructured, stressed loans as sub-standard unless there was a change in ownership of the borrowing company.
Now, the banks can treat the restructured loans for COVID-19-affected companies as a standard asset even if there is no change in ownership.
Five experts, led by K V Kamath, former chief of the New Development Bank of BRICS nations, will look into the finer aspects of the resolution plan.
Former State Bank of India managing director and vice-president for private sector operations and public-private partnerships at the Asian Development Bank Diwakar Gupta; eminent chartered accountant and chairman of Canara Bank T N Manoharan; management consultant Ashvin Parekh and India Banks Association CEO Sunil Mehta are members of the committee that will look into sector-specific benchmark ranges such as debt equity ratio, cash flow, et cetera, for forming the plan.
Going by one estimate, at least 80 per cent of the loans in the banking system will be eligible for such restructuring.
One way of looking at this is that it will delay the inevitable by two years. Also, the 10 per cent provision requirement seems to be low as the banks's unrealised but booked interest income from stressed borrowers is far higher.
By the RBI's estimate, the gross bad loans of the banking system, which dropped to 8.5 per cent in March 2020, could rise to 14.7 per cent by March 2021. The restructuring window may not allow such a spike.
The one-time forbearance was the need of the hour, particularly when all banks are not adequately capitalised. The good news is the presence of enough caveats to prevent misuse by the banking industry. In absence of this, many banks would have resorted to the tried and tested method of ever-greening -- giving fresh loans to the stressed borrowers to keep the accounts good.
In one stroke, on February 12, 2018, the RBI had abolished all existing frameworks for addressing stressed assets -- corporate debt restructuring (CDR), strategic debt restructuring (SDR) and the scheme for sustainable structuring of stressed assets (S4A), among others -- and dismantled the Joint Lenders' Forum (JLF), an institutional mechanism that was overseeing them.
The circular, issued at midnight, also asked the lenders to either execute a resolution plan for big stressed accounts (of Rs 2,000 crore/Rs 20 billion or more) within 180 days or file insolvency petitions against them in the insolvency court.
After the Supreme Court struck down this directive, the RBI, in June 2019, released fresh guidelines to deal with bad loans.
The latest restructuring scheme has diluted many of the norms that the central bank laid down then but the banks will find it difficult to misuse the new window.
Since 2001, the RBI has come out with a string of schemes at regular intervals, offering flexibility to the banking system for restructuring bad debt.
Different schemes approached the problem differently, ranging from the pooling of all the banking creditors in large accounts for such restructuring (CDR in August 2001) to distinguishing the sustainable part of the debt from the unsustainable [S4A, 2016]; stretching the repayment period beyond 20 to 25 years in infra projects [5/25]; and even taking over of the management of sick companies by resorting to the conversion of debt into equity [SDR in 2015] where bankers could either take control of failed companies and sell them to buyers, or ensure that they got a better price for the equity they held in such firms.
The CDR mechanism, the very first loan recast scheme to deal with the menace of bad loans, did not do much for multiple reasons.
Till September 2017, when it was dismantled, 655 accounts were sought to be restructured on the CDR platform but 125 (Rs 170,988 crore) of them were rejected.
The total loan value approved under CDR was Rs 4,03,004 crore, involving 530 borrowers. Some 291 accounts were withdrawn (Rs 1,72,463 crore).
Industrial sickness requires prompt corrective actions in a cohesive manner, which was never the case under CDR.
Most resolutions happened by writing off the bank loans -- a classic case of 'the operation was successful but the patient died'.
The restructuring was mostly carried out to rectify the lenders' books of accounts and not to revive the units. In nine out of ten cases, the promoters either failed to bring in their contributions, as laid down in the approved schemes, or could not give personal guarantees and other securities that they had committed to.
Often, the banks sanctioned fresh working capital and/or additional term loan just to protect their balance sheets. Revival of the sick units was not always their objective.
The RBI asking the lenders to provide for restructured loans on a par with non-performing loans from March 31, 2015, instead of 5-15 per cent, which they were required to do, rang the death knell of the CDR.
In walked more flexible schemes such as the JLF (2014), SDR, S4A and the 5/25 (2014) scheme for infra projects. All these were more flexible, had better features than the CDR mechanism but they too failed primarily because both the banks and the corporations were keen to recast schemes just to prevent big loans from turning bad.
The story continued till the RBI withdrew them on February 12, 2018.
Now, the RBI has reopened the window. Under the watchful eyes of five wise men, who know the industry well, banks will not find it easy to hoodwink the system.
But to make the scheme successful, the restructuring norms and the eligibility criteria of the stressed borrowers should be dynamic.
They must be reviewed every quarter, keeping in mind how the economic scenario evolves. Static norms will not serve the purpose.
Tamal Bandyopadhyay, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd.