Bad Loans And Choke Points

Context: Despite various attempts to create an efficient framework for resolving bad loans, poor ecosystem and legal delays frustrate many of these initiatives.

Issues associated with Bad Loans

• Lack of ground implementation of policy to resolve the bad debts: Over the last three decades, several institutional and policy measures were introduced, but, none of them delivered. 
  • They were abandoned subsequently. 
• Poor ecosystem and legal delays frustrate many of these initiatives.
• Many ARCs (private sector) are big players: The top five ARCs account for over 70% of the asset under management (AUM) and nearly 65% of the capital. 
  • Even private sector ARCs have not done well in the sale of zombie assets. 
• Financial and business restructuring appears to be more an exception than the norm: Nearly 1/3rd of debts are rescheduled. 
  • This is not much value addition to lenders at any additional cost.
• Delays under newfound promise: Elevated haircuts going up to 95% in some cases.
• Lack of judicial reforms: NCLT is the backbone of IBC, but lamentably is starved of infrastructure and over 50% of NCLT benches were bereft of regular judges.
• Issue of delayed recognition and resolution: 47% of the cases referred to the IBC have been ordered for liquidation. 
  • Over 70% of these cases were languishing at the now-defunct BIFR for years and decades. 
• Making decisions on the basis of first available information – Anchoring bias: The first available information in bidding for distressed assets is the cost of acquisition to ARCs. 
  • As per reports, distressed assets that are fully provided for may be taken over by NARCL at 20%.
  • This low cost of acquisition would suffer from the anchor effect and bias.
• Valuation is a highly contested issue.
• Fundamental problem of accumulation of elevated and recurring NPA generation.

Way Forward

• Either ARCs should consolidate or strategies as niche or regional players.
• Need judicial reforms for early and final resolutions.
• Business stress/financial stress needs to be recognised even prior to regulatory norms on NPA.
• 3-step process to mitigate anchor bias: 
• Acknowledge the bias; 
• Seek more and new sources of information;
• Drop anchor on the basis of new information. 
• Behavioural change to take back distressed assets. 
• NARC should uphold IBC principles, not dilute it: Otherwise, the credit culture suffers. 
• Should have a sunset clause of 3-5 years: This will avoid the perpetuation of moral hazard and also encourage expeditious resolution.
• Prevention of the accumulation of NPAs (below 2%) is critical.

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