Robust credit policy can reduce stressed assets
10 August 2018
With the impending quarterly results, the focus is again on the profitability of the banking sector. In the last financial year 2017-18, approximately Rs 1.5 lakh crore of bad loans were written off by the banking sector. Out of this, the share of public sector banks was over 80%. However, this cannot be looked at in isolation, since public sector banks also have a two- third share in the total lending.
The write offs are expected to increase in the current financial year as well. While some argue that the write-offs are "technical" in nature, and that the write-offs do not preclude the banks from taking action and recovering money from the errant borrowers, the extent of provisioning in the books may reduce the incentive for recoveries.
The withdrawal of various restructuring schemes like the corporate debt restructuring, strategic debt restructuring, Scheme for Sustainable Structuring of Stressed Assets by the Reserve Bank of India have further necessitated more provisioning requirements for the banks. Although the current non performing asset (NPA) and provisioning numbers sound alarming, it is vital to understand that increased provisioning and write-offs is a balance-sheet cleansing exercise, and by acknowledging the extant problem it ushers in more transparency for all the stake holders.
The write-offs have a direct impact on the profitability and hence the prescribed capital adequacy for the banks, which impacts their ability to lend. Bank recapitalisation plan of Rs 2.1 lakh crore and various other measures, including sale of assets, are being taken to strengthen the banks' balance sheet.
There are several estimates of the extent of stressed assets in the system and conservatively, it is believed to be 15-17% of the total advances. There is a strong push and resolve to address the current stressed assets either through the National Company Law Tribunal route or otherwise, but a long-term and sustainable fix to the problem is required. While there are macro economics factors at play which have also contributed to the stressed assets, the current monitoring mechanism of the banks has also probably fallen short, considering the mounting levels of stressed assets. Implementation of robust credit policies for sanctioning coupled with a strong monitoring mechanism would contribute to slowing down the pace of further addition to the stressed assets.
An equal focus is also needed on proactive and regular monitoring of the cash flows and other parameters of financial health of the borrowers, which will aid in identifying early signs of stress (and at times preventing) and enable the banks to focus on resolving the issue before the value of the asset deteriorates further. Here, the role of independent professional agencies having the requisite expertise, and which can work along with the banks to assist them in regular monitoring of the assets, identifying and responding to the risks will be very critical.
In the light of the stressed asset situation leading to the write-offs, it is safe to say that the gains accruing owing to reduced slippages can far outweigh the increased costs of credit monitoring. Although in lending business, some bad loans are inevitable, every commercial enterprise is run with an objective to generate money and going forward, the key thing to look out for would be how the banks address the current situation and gear up to reducing further addition of stressed assets and protecting their profitability.
The writer is partner business restructuring, BDO Restructuring Advisory