Banking without NPA!?

CONTEXT: Reserve Bank of India’s (RBI’s) Kamath Committee on restructuring of loans gave its recommendation recently. Due to stringent conditions, very few companies would avail the facility defeating its purpose of restructuring.

Recommendation of the Committee:

• Eligibility: Window available only for COVID related stress.

• Only those accounts that were standard as of 1st march 2020 are eligible.

• A Resolution Plan: Under RBI’s guidelines, 60% of lenders by number and 75% by value must agree to a plan that is, essentially, a leap of faith.

• Dropouts are discouraged and would attract a high 20% of provisioning.

• Time-Bound Process: Resolution to be invoked by 31st December 2020 and implementation within 180 days.

• Remaining Tenor of the loan not to be extended by more than two years.

• Sector-specific recommendation: Sector-specific financial ratios given by the Committee would help banks to qualify companies for restructuring. 
• Expert Committee and rating agency: for approving the final restructuring plan of all loans above INR 1500 Crores.

Issues with the Recommendations:

• Discretion with the Banks: COVID related stress has given discretion to the bank on deciding which company should be eligible.

• Dropout Discouraged: By giving higher provisioning ratio of 20%.

• Private banks are likely to choose this option and exit due to stringent conditions imposed.

• Subjective Ratio: Sector specific Ratios recommended such as DSCR (Debt service coverage ratio) is a function of projected cash flow, GDP growth, sectoral demand and supply, competition and technology change, which are highly subjective.

• GDP projections for FY 2020-21 range from -15% to -5%.

• No Guarantees offered: Even if the company meets stringent eligibility criteria, no guarantee that resolution process will be quicker due to the vetting process or account becoming NPA in the coming years.

Way Ahead

• Remove extra regulatory measures: as they could reduce bank to mere implementation agency without responsibility, as final resolution plan is vetted by expert Committee and rating agency.

• Banking is the business of taking risks, in good faith and without negligence.

• Lesson from 2008-9 crisis: RBI’s plan of restructuring failed due to endless time in formulating resolution plan and delay in resolving previous NPAs.

Conclusion: Banking without NPA is like religion without sin; they both don’t exist.