Good Loans, Bad Loans And Capital: The Many Issues India’s Lenders Are Grappling With

Life isn't getting any easier for India's public sector lenders. Bad loan recognition may be at an advanced stage, but resolution and capital remain binding constraints. To add to that, the RBI has a tough corrective action framework in place and investigative agencies are aggressively pursuing leads into possible wrongdoings at banks.

Each of these issues came up for discussion at a meeting of government-owned lenders from the Western and Southern regions on Friday, three bankers who attended the meetings told BloombergQuint on condition of anonymity. Some of these were also discussed with interim finance minister Piyush Goyal, who met with the lenders and assured government support to these banks.

The meeting came against the backdrop of another surge in bad loans across banks in the March quarter. Gross bad loans of listed lenders now stand at Rs 10.3 lakh crore or over 11 percent of total advances. In a speech on Saturday, former RBI Governor YV Reddy said the surge in bad loans and other factors had meant that confidence in the workings of public sector banks is at a historic low.

Bankers, who met in Mumbai on Friday, are trying to find industry-wide solutions to some of their common problems.

Lending To Good Accounts

As part of these discussions, banks noted that the limitations placed on 11 public sector lenders by the Reserve Bank of India under the prompt corrective action scheme, are impacting flow of credit.

Banks under PCA are not allowed to expand their risk-weighted assets, which limits their ability to give large term loans to companies. Restrictions like those on Dena Bank even prohibit the bank from extending any working capital credit that its borrowers may need.

Bankers agreed to work on ways to ensure credit to borrowers of banks under PCA. In the case of consortium loans, healthier banks may consider contributing a larger chunk of the credit requirement if a PCA bank is unable to contribute its part, said the bankers quoted above.

Banks like SBI and Bank of Baroda, may even consider taking over lower rated corporate loan accounts from weaker banks. This may help the banks under corrective action reduce their risk weighted assets quicker, said the bankers.

Banks also agreed to continue funding micro, small and medium enterprises (MSMEs). The government has been asking lenders to ensure this segment doesn't take a hit due to the banking sector's troubles.

A Bad Bank?

Bankers also felt that stressed asset management is taking up too much of time and resources. Resolution via the Insolvency and Bankruptcy Act is also proving to be a long drawn out process.

Bankers have formed a committee under Sunil Mehta, chairman of Punjab National Bank, to look at the option of setting up an AMC/ARC structure, said the bankers quoted above. This entity would purchase bad debt from banks and help turn it around. This is akin to a bad bank like structure.

The Mehta committee would consist of bankers from SBI, Bank of Baroda and some other select lenders. It will submit its initial report in two weeks.

As part of its assessment, the committee will also look at the feasibility of this AMC/ARC being funded by banks, foreign funds and/or the National Infrastructure Investment Fund.

Still More Capital?

During their meeting with the interim finance minister, bankers expressed the need for more capital. The government had announced a recapitalisation package of Rs 2.11 lakh crore last year. However, the continued increase in bad loans has meant that the recapitalisation package may fall short.

According to the bankers quoted above, Goyal assured bankers that they would get the capital they need. However, they would first need to close some large resolutions under the insolvency scheme and also sell non-core assets.

After this, banks could come back with further capital requirements and the government would provide the necessary funds, Goyal is said to have told bankers.

Comfort In Lending

Bankers remain concerned about the proceedings by vigilance and investigative agencies, said the bankers quoted above. According to them, this restricts their ability to take tough commercial decisions like large haircuts in stressed loans.

As such, bankers have decided to create board level oversight committees, which will assess one time settlements with errant borrowers and complex restructuring schemes. These oversight committees, consisting of former judges, investigative officers and regulators, will sign off on the plan before it is implemented.

To be sure, the RBI had also created a similar oversight committee in June 2017, which approved restructuring plans under the scheme for sustainable structuring of stressed assets (S4A). This has now been disbanded since the RBI withdrew all of its restructuring schemes in February 2018, including S4A.

Friday's meeting focussed on lenders from the Western and Southern parts of the country. Another meeting with banks from Eastern and Northern states would be conducted shortly, the bankers quoted above said.