In an interview with Indianbankingnews.com Editor Manju AB just before retiring as SBI chairman, Rajnish Kumar talks about one-time debt restructuring, non-performing assets (NPAs), and the impact of Insolvency Bankruptcy Code (IBC) on the recovery of bad loans. He also admits that Jet Airways could have been revived if promoter Naresh Goyal had ceded control earlier.
How much of bank credit would go for one-time debt restructuring under the Reserve Bank of India's scheme amid the Covid-19 crisis?
We expect banks to restructure loans worth not more than Rs 1.5 lakh crore. This may be a conservative estimate, but trends indicate that it would definitely not exceed Rs 2 trillion.
We have extrapolated from the restructuring pipeline of the SBI and based on that trend, made an estimate for the banking sector as a whole. There are different estimates, some of which have even pegged the restructuring amount beyond Rs 8 trillion. But they have not specified the time frame. Personally, I feel that the Rs 8-trillion figure is grossly overestimated. We are not seeing a rush from corporates seeking restructuring of their loans. Several large corporates have deleveraged and been cleaning up their balance sheets.
There is no fear. Banks will have to carry higher provisioning on the restructured debt, even though it is standard assets on our books. We will have a two-year window to keep watch on how certain assets behave and take steps accordingly. If the economic recovery is slow, the non-performing assets (NPAs) will be built over a period of time. Damages will be manageable, but the small and medium enterprises (SMEs) could be the worst hit.
It could be in the region of Rs 20,000 crore. Of this, Rs 7,000 crore may be from corporates and Rs 3,000 crore from retail loans. The maximum will be from the micro, small, and medium enterprises (MSMEs).
It will be a real estate-focused fund with an investment plan of up to $1 billion as initial equity. While Brookfield will hold 60% stake, SBI and HDFC will own 20% each in the entity. This will, however, be subject to regulatory approvals. We see a lot of potential in the real estate sector, which continues to be stressed.
With the asset valuation taking a hit due to the spread of the Covid-19 pandemic, for any local or foreign investors this is the right time to invest in stressed assets. Also, the Supreme Court has upheld the supremacy of the Committee of Creditors (CoC) over operational creditors in the Essar Steel insolvency case. This judgment has laid to rest many apprehensions in the minds of foreign investors. They have also realised that if any country has the potential to become the next growth centre after China, it is India. In the present situation foreign investors are more bullish about the Indian economy than even our local businesses.
Sale of stressed assets to the ARCs is not going to be very high this year as we had loan moratorium and are in the process of implementing one-time loan restructuring as per the RBI scheme. Besides, banks are selling bad loans through all-cash deals. There are also many cases in the Insolvency and Bankruptcy Code, 2016 (IBC).
I think we have reached the bottom. Job losses have already happened, and we have factored in everything. Of course, Covid cases are still out of control. But things have started looking up in certain sectors like FMCG (fast-moving consumer goods) and steel. We are witnessing demand coming back for car and home loans. Corporate credit offtake, however, has been slow.
Yes, this is the best time to lend. As the prices of assets are not elevated, chances of investments going bad are limited. If, for example, you buy a property today, the chances of your going wrong are low.
As far as lending goes, I have always held a contrarian view. While lending during the time of exuberance, there is a bigger chance of building up NPAs. When your loan book is growing at the rate of 20-25%, the chances of credit decision going wrong are high. When you are growing at 8-10%, the chances of taking faulty credit decisions are low.
The suspension of the IBC for six months has only prevented the creditors to initiate corporate insolvency resolution process (CIRP) against borrowers who have defaulted after 25 March. In other NPA cases, we are deciding the resolution on merits and many accounts are being resolved through inter-creditor agreements (ICAs).
The IBC has proved to be a good resolution mechanism. NPAs of approximately Rs 4.50 lakh crore have been resolved through this route, with average recovery of 43% for all banks. Our recovery through the IBC is around 55% of our outstanding on these borrowers. Banks could not have imagined this kind of recovery through SARFAESI or debt recovery tribunals (DRTs), especially in case of large borrowers.
Banks could not have resolved accounts like Essar Steel, Bhushan Steel, and Electrosteel Castings, with change of management and transfer of assets as going concerns. Assets changed hands at the enterprise value, all jobs were preserved, and the CD generated EBITDA during the CIRP period. Preservation of the enterprise value is not possible under SARFAESI or DRT as they are recovery acts. Under these acts, it has also been very rare to sell the assets as going concerns after lenders have taken over possession.
The only issues with the IBC are slow disposal by the National Company Law Tribunal (NCLT) and lack of an organised marketplace for assets under liquidation.
Jet Airways could have been revived had promoter Naresh Goyal ceded control earlier when the airlines was doing well and fuel prices were low. Aviation is a risky business and its viability depends on reasonable fuel prices. The pandemic also played a role in spoiling the scene as the aviation sector itself went into a spiral. A going concern has better chances of revival than a shutdown business.
We can only say that there was no nexus between bankers and corporates. If you consider the role of a banker, it is actually the larger partner in the enterprise and hence has to work closely with the promoters and the corporate debtors. If anybody calls this a nexus, then it is belittling the efforts of bankers in nation-building.
But one aspect which received criticism is that banks were trying to hide the NPAs and hence collaborating with the borrower. Now if you consider the pre-IBC scenario, when there were mechanisms like the CDR, SDR, S4A, banks had to depend on promoters to make the restructuring successful. There was not much leverage banks had over the promoter. The only alternative was to drag the corporate debtor to the DRT where you cannot expect a recovery in 8-9 years at the rate of 3-4%. However, the IBC has changed that by providing the control of the corporate debtor to the resolution professional and suspending the board. We have total control over the affairs of the corporate debtor and a regulated professional to conduct the entire process.
Banks feel empowered and can confidently work on a resolution plan. They can negotiate with the resolution applicant, who is different from the existing promoter. This has already brought in a sense of credit discipline and restored the balance of power between borrowers and creditors.
The IBC is a very strong law and must be used judiciously. We are invoking the IBC on case-by-case basis. We first look at the peculiarities of the case and explore the possibility of arriving at a resolution outside the IBC.
