THE RE­FORMS BLUE­PRINT

The lat­est 11-point gov­ern­ment plan to head off the cri­sis in In­dia’s bank­ing sec­tor came out of a ‘PSB man­than’ of whole-time di­rec­tors of pub­lic sec­tor banks and se­nior ex­ec­u­tives in Novem­ber 2017

India Today - - THE BIG STORY / BANK NPAS -

1 En­sure that loan ap­provals are based on rig­or­ous due dili­gence

Banks do al­ready have due dili­gence pro­cesses, but the scale of the NPA prob­lem proves these were not be­ing fol­lowed. A fi­nance min­istry anal­y­sis re­vealed high­way projects in which loans were dis­bursed be­fore en­vi­ron­men­tal clear­ances had been granted and power projects that be­gan work with­out know­ing who would sup­ply the coal or buy the elec­tric­ity. Projects with in­com­plete busi­ness plans are al­most cer­tain to face dif­fi­cul­ties dur­ing re­pay­ment. 2

En­sure that bor­rower’s bal­ance sheets are scru­ti­nised and cash flows are ap­pro­pri­ately ring-fenced

Fi­nance min­istry of­fi­cials say in many cases banks did not have the ex­per­tise to prop­erly ex­am­ine bor­rower pa­per­work, fail­ing to iden­tify ar­ti­fi­cial lever­ag­ing and over-in­voic­ing, such as is al­leged in the case of Es­sar Projects, cur­rently with the Na­tional Com­pa­nies Law Tri­bunal (NCLT). Ring-fenc­ing bor­rower cash flows might help—funds granted for a spe­cific project will be mon­i­tored to en­sure they are not di­verted to other uses.

3 Take note of non-fund and tail risks em­bed­ded in project fi­nanc­ing

Non-fund risks ap­ply to bank guar­an­tees and let­ters of credit. Ni­rav Modi’s fraud de­pended heav­ily on pa­per­work like this, us­ing bank guar­an­tees from one bank to take loans from an­other. Tail risk ap­plies to projects that take a sig­nif­i­cant amount of time to com­plete. In such cases, the ‘fin­ish­ing’ stage is usu­ally when cost and time over­runs/ miss­ing per­mits be­come out­right li­a­bil­i­ties. Banks need to es­ti­mate the risk (and cost) of such over­runs, bud­get ac­cord­ingly.

4 In­crease the use of tech­nol­ogy and an­a­lyt­ics for com­pre­hen­sive due dili­gence across mul­ti­ple reg­u­la­tory data­banks

In the same way that CIBIL main­tains credit re­ports on in­di­vid­ual bor­row­ers, in­dus­try boards main­tain re­ports on com­pa­nies in their field. Cross-ver­i­fi­ca­tion of in­for­ma­tion given by loan ap­pli­cants from these data­bases would add an ex­tra layer of cer­tainty to de­ci­sion-mak­ing, and might even help banks iden­tify cor­po­rate bor­row­ers who are hid­ing rel­e­vant in­for­ma­tion. Ac­cord­ing to the fi­nance min­istry, this ap­plies to Re­liance Com­mu­ni­ca­tions, which ne­glected to in­form banks that it had taken sig­nif­i­cant loans from Chi­nese lenders. This was both il­le­gal and could not have hap­pened with­out the con­nivance of bank of­fi­cials.

5 Lead banks in a con­sor­tium must build ca­pac­i­ties for techno-eco­nomic val­u­a­tion. Sec­ondary banks to help via val­i­da­tion or as­sess­ment

Banks have shown a very poor ca­pac­ity to as­sess and mon­i­tor risk. The projects be­ing at­tempted to­day of­ten de­pend on a great deal of tech­ni­cal knowl­edge and do­main ex­per­tise, which is also es­sen­tial to valu­ing them and as­sess­ing their risks. If a bank can­not fully com­pre­hend the tech­ni­cal scope of a project, it can­not ac­cu­rately es­ti­mate as­so­ci­ated risks and costs.

6 Loans over Rs 250 crore to be mon­i­tored by banks (with help from ex­perts) af­ter dis­burse­ment. Banks in a con­sor­tium to share in­for­ma­tion, en­sure all are on the same page.

This par­tially re­lates to the point re­gard­ing techno-eco­nomic val­u­a­tion. Un­til now, there has been no spe­cial-

ised mon­i­tor­ing of big loans, es­pe­cially by out­side par­ties. Bankers, how­ever, are con­test­ing this point, ask­ing what is their role if third par­ties are to be in­volved in mon­i­tor­ing loans.

7 A con­sor­tium will only have nine banks, with each bank con­tribut­ing a min­i­mum of 10 per cent of the to­tal loan

It has been ob­served that de­fault­ers tend to clear the smaller dues to banks in a con­sor­tium while de­lay­ing pay­ment of the largest chunk, in or­der to get re­lief by claim­ing some dues have been cleared. Smaller con­sor­tiums will also be eas­ier to man­age, and with each bank hav­ing a clear and equal stake, due dili­gence should im­prove.

8 A stan­dard on­line pro­ce­dure for val­u­a­tion in con­sor­tium loans, to align pe­ri­od­ic­ity and val­u­a­tion meth­ods, so that all mem­bers have ac­cess to the in­for­ma­tion

Fi­nance min­istry of­fi­cials say In­dian banks (even those that is­sue loans in a con­sor­tium) some­times didn’t have pro­ce­dures for in­for­ma­tion shar­ing about de­layed pay­ments. This is stan­dard prac­tice in­ter­na­tion­ally.

9 An ap­proved pol­icy for strict seg­re­ga­tion of loans and as­sign­ment of re­spon­si­bil­i­ties for ap­praisal, mon­i­tor­ing and re­cov­ery

In many banks, loan pro­ce­dures were found to be one or two-man jobs, which left a great deal of scope for col­lu­sion/ cor­rup­tion, and also con­trib­uted to a lack of ap­pro­pri­ate loan mon­i­tor­ing.

10 Changes in the In­sol­vency and Bank­ruptcy Code to en­sure that NPA ac­count hold­ers can­not re-pur­chase their com­pa­nies dur­ing bank­ruptcy pro­ceed­ings

This en­sures there is a clear cost to pro­mot­ers who are re­spon­si­ble for NPAs, and also that they can­not ben­e­fit by buy­ing back bank­rupt firms for pen­nies on the dol­lar.

11 The RBI has been au­tho­rised to di­rectly re­fer NPA cases to the NCLT

In the past, the fact that the RBI did not have this power meant that com­pa­nies it had al­ready de­ter­mined were un­fit/ loan de­fault­ers could de­lay the process via po­lit­i­cal in­ter­ven­tion.

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