The Insolvency and Bankruptcy Code (IBC) has changed the equation in the lender-borrower relationship, with errant promoters of companies now eager to resolve their bad debt mess at the earliest for fear of losing the company itself, say top bankers of the country.
State Bank of India (SBI) Chairman Rajnish Kumar, ICICI Bank Managing Director & CEO Chanda Kochhar, Union Bank of India MD & CEO Rajkiran Rai G, Standard Chartered Bank India head Zarin Daruwala, and former Reserve Bank of India (RBI) deputy governor K C Chakrabarty were participating in the panel on Banking – The Way Forward at the Business Standard Banking Round Table, 2017, here in Mumbai.
“The balance of power has definitely shifted after the IBC (Insolvency and Bankruptcy Code),” said Rajnish Kumar, adding bankers were now in a much more powerful position to recover their bad loans and dictate terms to errant borrowers.
“There is a sense of urgency on the side of the promoter and it is also driving good resolution,” said Daruwala.
IBC is also the biggest reform under the present government for the banking sector, and banks should not complain when the terms are tough.
“There cannot be two approaches as far as IBC is concerned. This is what the bankers were demanding. Persuading the government to bring the Code and then saying we are not interested in it is not right,” said Kumar.
In fact, in Japan, banks recover 90 cents to a dollar because of the Bankruptcy Act, whereas in India, the recovery rate is only 25 cents. The Code should be able to change that, said Daruwala.
Bankers stressed that the need of the hour was to start working on the resolution of bad debts, estimated at above Rs 10 lakh crore already, rather than keeping on talking about recognition. The system could be already late in acting on this critical aspect.
“We are living in an economy where the demand for credit will continue to grow. We just cannot sit on decisions and allow the projects to go bad. We are only debating on recognition, but we should start working on resolution, we can’t afford to even debate on it,” Kochhar said.
Chakrabarty gave a different spin to the debate by stating that banks should not find problems somewhere else, but focus on repairing their books immediately on their own.
“When you are in problem, don’t look at the problem elsewhere. Your profit and loss account is already damaged; repair your assets and liabilities first. If there is a problem with capital, blame the owner of the capital. It is the system as a whole which is the problem; we have to all take responsibility,” Chakrabarty said. He also mentioned a wide divergence in reporting bad debt in banks’ books, stating that despite all the information at disposal, banks might have done a less than honest job in recognising their stress.
But bankers defended themselves, stating interpretation of the same laid down rule could be different for different parties. A note in point here was that India is only one of the few countries where non-repayment of dues within 91 days amounts to the asset being classified as non-performing. In most countries, it is left to the bank to recognise if an asset is stressed, as long as the disclosure is full and transparent to shareholders.
“Divergence (in NPA numbers) comes because of the interpretation issue. The interpretation depends upon the situation at the time,” said Rajkiran Rai G. Even as a project is doing good and generating cash flows, it can be tagged as NPA if it misses a milestone payment. Banks are also hamstrung by the fact that once an account is labelled NPA, lenders are hesitant to put further money in it and aid it at time of its needs, Rai said.
The reason why credit growth is low in the system could be that the present growth is now led by the services sector, and not by manufacturing. Therefore, demand for working capital loans and other project financing is tepid. Besides, companies are also moving to the bond market, affecting banks.
The deleveraging exercise undertaken by companies also means that they are not borrowing from banks as much as they used to earlier, said Kumar.
However, Chanda Kochhar maintained that companies did need money, and if disintermediation (other sources of funding) was added, the banking growth could be in the range of 12-12.5 per cent, against the banking system’s credit growth number of sub-10 per cent.
The bankers also assured that deposits were not threatened by the new Financial Resolution and Deposit Insurance Bill, as it was an improvement over the present system. Under the present system, deposits up to Rs 1 lakh is protected. That continues to remain the same under the new Bill, while the regulator would always come in the way to protect depositors, like it has always been, whenever a bank is in a trouble.
While bankers agreed the biggest challenge for now remained NPA and its resolution, the biggest opportunity was seen as coming from the micro, small and medium enterprises (MSMEs). And, this would be the space banks might target in the future for growth. The sector generates 40 per cent of the employment and would be growth driver of the future, bankers said.
The banking industry also needs to change and adopt for themselves an ecosystem rapidly moving on to the digital space, they said. #BSBankingRT Tweets