Bad Loans And Choke Points

The Indian Express     22nd November 2021     Save    

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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