NPA Resolution 2.0

There are a few 'radical' options before the government for dealing with bank NPAs.

There are a few “radical” options before the government in dealing with bank NPAs

The government is considering radical ideas to deal with the mountain of NPAS piled up by Indian banks, disclosed Finance Minister Arun Jaitley recently. Uday Kotak, Executive Vice- Chairman of Kotak Mahindra Bank, who knows a thing or two about resolution, is rooting for 'bad banks' to deal with the `14 lakh crore of stressed assets portfolio. “When I mean bad banks, I mean two or three large well capitalised bad banks. (This) is the way we should be thinking about it. I don't know what the government is thinking,” says Kotak.

The various resolution mechanisms available to banks including corporate debt restructuring (CDR), strategic debt restructuring (SDR) and the scheme for sustainable structuring of stressed assets (S4A), haven’t given the desired results because of the issue of quantum of haircut or one time settlement. There is a suggestion for more independent committees to encourage bankers to take haircut decisions. This would encourage bankers to take quicker decisions and also shield them from any future investigations.

Kotak's bad bank idea also resonates with the proposal mooted by the Reserve Bank of India's (RBI) Deputy Governor Viral Acharya. He recently suggested setting up two asset management companies. A Private Asset Management Company (PAMC) to deal with stressed sectors where assets are likely to have economic value. Another arm, a National Asset Management Company (NAMC), would be necessary for sectors where the problem is not just of excess capacity but possibly also of economically unviable assets in the short-tomedium run. Acharya gave the example of the power sector where projects are stalled because of fuel shortages and lack of power purchase agreements (PPAS). Another radical idea on the table is allowing the central PSUs – such as SAIL, NTPC, etc. – to buy some of the large assets. But it’s easier said than done. In a challenging economic environment the PSUS are also facing headwinds. For example, SAIL’S losses have crossed `5,000 crore in the last 18 months because of a crash in steel prices. Similarly, NTPC has been witnessing stagnant growth in its sales and profitability over the last three years. “Does it make sense to buy coal fired projects for NTPC when the company itself is diversifying its portfolio through hydro and renewable energy projects ?” asks an equity analyst. A PSU buying a private sector company also often leads to a problem of cultural differences and other human resources issues at all levels.

Capital starved banks are in a tight spot. It is also not in the interest of banks to sell assets at dirt cheap prices. They are also not too happy with Asset Reconstruction Companies (ARCS). State bank of India (SBI) Chairman Arundhati Bhattacharya has already said on record to say that ARCS are not doing a quick job. There is also no global interest in stressed assets. In July last year, SBI joined hands with Canadian major Brookfield and three months later, ICICI Bank tied up with Apollo and Aion. The market is yet to see big deals taking place. Ultimately, the resolution would boil down to ‘pricing’ and getting the right strategic buyer to run the plant. ~