INSUBCONTINENT EXCLUSIVE:
By V SrinivasanThe financial system continues to be stuck in a swamp
And as it lashes out trying to drag itself out, more participants seem to be getting dragged into the swamp
environment today.
Whenever commentators talk of tepid credit growth, poor transmission or inadequate channel financing, it all boils down
to the mistrust in the system, basically inability to take anything at face value, either in the manner portrayed on the books or
elsewhere.
Now, the panacea that has been largely talked about to break this spell of mistrust is another asset quality review (AQR) for
non-bank financial companies (NBFCs)
Would it actually turn out that way?
Look no further for answers than the AQR for banks.
The Reserve Bank of India (RBI) directed banks to
refer to the National Company Law Tribunal (NCLT) two lists of cases, the first one comprising 12 stressed accounts in June 2017 and the
second list with 26 names in August 2017
still in mid-single digits in terms of the number of cases in which the resolution (other than liquidation) has been completed and banks
have realised proceeds from such resolution
One can give the benefit of doubt that this is a learning process for all stakeholders and once we get over the teething problems, the IBC
process can provide for any efficient and time-bound resolution.
What has all of the above meant for lenders? For starters, a much higher
haircut than what was initially envisaged
This has also meant that projections of capital requirements in banks have gone haywire and banks have had to set aside much more capital
for these assets than they had budgeted for
The government has had to pump in much more capital in banks since proceeds from the resolution of stressed assets have not provided any
resolution actually puts the system in a very difficult spot and will bog down in multiple ways, resulting in risk aversion, inefficient
allocation of resources and always being thirsty for capital
Without any efficient and time-bound resolution, bunched up recognition of stress such as an AQR process will only push the system further
governance on an asset basis to keep the resolution process on the rails
Each asset has its own unique characteristics in terms of composition of lenders, nature of collateral, status of project, promoter
It is important to identify the large stressed assets and have an independent governance framework (possibly regulator driven) that forces
flexible and equitable resolution plans to be implemented in a transparent and time-bound manner
The governance framework would ensure that decisions taken provide suitable indemnity to stakeholders, especially prospective buyers, and
should also have an ability to force decisions when there is a logjam in the process.
The government should foster mechanisms like a
stressed assets fund to buy assets through this resolution process at enterprise value that is at an appropriate discount to the sustainable
debt, help create value and then sell it further at a later date
Irrespective of mechanisms used, successful bottom-up resolution is key to ensuring value accrues to lenders as well as other stakeholders
and the overall system.
Successful resolution of large stressed assets would create a positive momentum and infuse risk appetite in an
otherwise moribund lending environment
Therefore, for an NBFC asset quality review to pull the system out of the swamp, it is important to identify large stressed real estate
projects, lay out key issues related to them and have a clear road map in terms of dealing with them ahead of such recognition
is a banking and financial markets expert)