There’s a near pindrop silence on the 15th floor of the Edelweiss Tower. Located in Mumbai’s Kalina area, the glass exterior building is the hub of the now 20-year-old financial services firm founded by Rashesh Shah and Venkat Ramaswamy soon after liberalisation.
I think it’s not a bad ratio. A lot of people don’t calculate the numbers... When you add up the data, you see that 20 percent of the bad loans have been sold to ARCs.Rashesh Shah, Chairman And CEO, Edelweiss Group
Not everyone views the numbers with Shah’s glass-half-full lens.
At a Bloomberg organised private equity forum in mid-March, Sanjay Nayar, head of KKR’s India unit, which has applied for an ARC licence, said that the market for bad loans is “nowhere near clearing price”.
In a report dated March 28, Sanjiv Prasad, co-head of Kotak Institutional Equities, took a similar position. “We have hardly seen any progress on private ARCs acquiring large-sized stressed assets from banks..,” wrote Prasad while attributing this to the inability to establish the right price for stressed assets and inadequate capital among private ARCs.
While Shah doesn’t buy the narrative that there is no resolution in sight, he acknowledges that banks want to sell far more than what is getting sold.
As an example, he says that if banks are putting up Rs 2 lakh crore in bad loans for sale, about Rs 40,000 crore to Rs 50,000 crore is actually being bought. “But that is because those loans are not priced at the right level or they are loans that are not revivable,” Shah says.
A Year Away From Large Bad Loan Sales
Shah believes that the pace at which bad loans or non-performing assets (NPAs) are getting sold will pick up in the next 12-18 months. That statement doesn’t stem from hope but from fact.
Under the existing rules, banks are required to step up provisions against bad loans over a period of time. The rules say that the longer a loan remains in the ‘doubtful’ category, the more a bank has to provision against it.
In the first year, the minimum provision is 25 percent but this goes up to 40 percent if the loan remains stressed for one to three years. Since a large proportion of bad loans were recognised in financial year 2016-17, banks will have to step up provisioning this year if the loans remain stressed.
As banks step up provisions, they will be in a better position to take haircuts on these loans.
Our experience is that an asset after becoming an NPA takes about 3-3.5 years to be marked down to the real price... I think that point is a year away for a lot of assets. A lot of assets are almost marked down but a little bit more is required. Maybe the price is 40 and banks are still carrying it at 50-55. But another one year of provisioning will close that gap.Rashesh Shah, Chairman And CEO, Edelweiss Group
Closing that gap may not be easy as the funds required to make the necessary provisions are large.
In a February report, brokerage house Credit Suisse cautioned that there is a ‘wall of provisioning ahead’ and estimated that the additional provisioning needs in financial year 2017-18 could be as high as Rs 86,000 crore.
Noting the slow pace of resolution and the large provisioning needs, Credit Suisse, which has tracked the corporate debt crisis closely, called for government intervention of some kind. It suggested considering a bad-bank like structure which can be used to speed up the process of cleaning up bank balance sheets. Others, like Nayar of KKR, too have supported a bad bank.
Shah disagrees.
In his view, it is essentially to stick to a market-based mechanism to ensure realistic pricing of stressed assets. The market should decide the fair price for every loan based on recoverability, he says.
Besides any government intervention will give rise to murmurs of crony capitalism, Shah cautions. He thinks the government has been pragmatic by not giving in to calls to find an ‘overnight’ solution to a bad loan problem that has been created over years.
Shah chooses an unusual analogy to make his point.
“...if a kid is to be born, it will take nine months. No matter how good a doctor you are, you can’t do it in five-six months.”
Helping The Process Along
That’s not to say that Shah wants the government and the regulator to be completely hands off. There are small steps that can be taken to help the process along.
One such step is to create an environment which can help banks take tough decisions on haircuts without fearing prosecution down the road.
“Something like an oversight committee which will allow bankers to have some kind of ring-fencing and protection,” Shah suggests. Such oversight committees are actively under discussion, BloombergQuint reported in March.
Shah also believes that the Insolvency and Bankruptcy Code can play a significant role. Edelweiss ARC has already taken four cases to the National Company Law Tribunal (NCLT) and Shah thinks the introduction of the code will prove to be a defining moment for Indian business.
The court-driven resolution committees can provide bankers comfort on taking tough decisions, says Shah. In addition, the bankruptcy code has also helped clarify that creditor dues are superior to government dues such as unpaid taxes.
In fact, he believes that the existence of the code has already titled the scales in favour of creditors.
It works in many ways. One is the threat of this. The law is so well drafted that no promoter can go to court and delay the whole thing. Once it goes into the bankruptcy code, you have only 180 days and after that it goes into liquidation. So a lot of promoters are scared because that is playing with fire.Rashesh Shah, Chairman And CEO, Edelweiss Group
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