NPA vigil has improved corporate culture

Srinivas Dindi | Updated on January 10, 2021

The government measures and RBI provisioning norms have helped India Inc cope with Covid

Indian corporates have so far been able to weather the Covid shock. This provides occasion to take stock on how corporate credit evolved over the last decade, enabling corporates to face the current unprecedented stress.

Indian corporates emerged relatively unscathed from the 2008 Global Financial Crisis and entered into the last decade with hope driven by huge infrastructure opportunities thrown up by the government.

The absence of development financial institutions did not deter banks from funding these ventures despite maturity mismatches of assets and liabilities. Corporates which could bag bids had floated number of SPVs which were literally single asset companies with no restrictions on the part of the parent to extend corporate guarantee.

Banks were also not aware of the serious implications going forward if the underlying asset did not perform.

The going was good till these assumptions proved to be optimistic. At the same time, a number of scams had surfaced during the UPA II regime. While nothing concrete could be proved except in a few cases, it had an adverse impact on the economic environment, deflating the overall sentiment and leading to policy paralysis.

Intervention of courts

Courts also had to intervene in the interest of natural justice cancelling mining licences which had further dampened the sentiment. All these factors led to stress in the corporate balance sheets which in turn resulted in stressed bank balance sheets.

Promoters who could siphon off/divert funds, started showing a disinclination to resolve the stress, leaving it to banks. In turn, banks resorted to restructuring loans to ensure there was no dilution of NPV which provided for maintaining asset quality as standard, while the resolution plan was neither helping corporates nor banks in the long run. Subsequently, however, the tide turned.

At this juncture, the then RBI Governor Raghuram Rajan coined the term ‘Skin in the Game’, bringing in a series of measures. These included: reporting of irregularity/default to Central Repository of Information on Large Credits (CRILC) for sharing of information among banks/FIs; disbanding CDR mechanism and transferring the responsibility of stress resolution to a consortium of banks under Joint Lenders Forum (JLF) while minimising the policy intervention from the RBI; 5/25 scheme with an option to refinance every five years depending upon cash flow visibility to ease the asset-liability mismatch for banks; Strategic Debt Restructuring with a change of management bringing in the concept of sustained and unsustained debt, etc.

Though all these were withdrawn subsequently, they brought in some discipline and change in thought process among bankers as well as promoters.

A landmark regulation at this stage was to treat restructured accounts as NPAs which, in the short term, proved to be a pain point for both banks and corporates. But both are now reconciled to this and are keen to establish viability before being subjected to restructuring.

The government’s Insolvency and Bankruptcy Code is another landmark initiative to distinguish unviable entities and proceed with liquidation.

Similarly, with demonetisation and GST implementation, while battles were lost in the form of adverse impact on unorganised cash economy, the larger battle was won as reflected in increased digital payments and financial inclusion.

Banks have been leveraging technology to improve due diligence and monitoring functions. All these measures have instilled a sense of discipline among promoters who now need to have the wherewithal to withstand losses or risk losing their companies.

All these measures have made corporates resilient over a period and helped them withstand the impact of Covid.

There has been a gradual improvement in solvency, gearing and liquidity ratios of corporates over the last decade.

This fact is also reflected in the relatively low number of corporates opting for restructuring under Covid norms and promoters trying to avoid the tag of a ‘restructured account’.

The writer is AGM, SBI, Industrial Finance Branch, Hyderabad. Views are personal

Published on January 10, 2021

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