Sunil Kanoria: A way to tide over the NPA problem

Proactive intervention of the government and the RBI is necessary to reduce the burden of non-performing assets and revive growth

India is today the world's fastest growing economy. Yet, there's a dearth of private investment by domestic as well as foreign investors. This is closely linked to the inability of banks to finance new investments because they are saddled with a huge amount of non-performing assets (NPA).

To stimulate growth and to generate new employment opportunities, the government and the Reserve Bank of India (RBI) need to extend support to industry and entrepreneurs so that they are not afraid to take calculated risks. This is the only way by which the government can pursue its goal of Startup India and create a million new entrepreneurs.

For this, we must solve problems of the past that are preventing banks from lending. Companies where the managements have wilfully become defunct due to mismanagement should be dealt with sternly. However, companies which have become sick due to reasons beyond their managements' control should be facilitated with investor-friendly polices by:

(i) addressing industry-level issues through proper policies;

(ii) enacting appropriate laws and rules to help the companies retrieve whatever assets they can to service their respective dues.

Locking capital in unproductive assets is not the solution, as this will not generate any income to service debts or pay taxes and salaries. There may be a few cases where a change of management is required: if the earlier management has been disbanded or the existing one is found wanting of ideas, willingness and creativity.

The main intent of the current Special Drawing Rights regime is to allow financial institutions to revive a stressed company/project by taking control of it through the conversion of debt/exposure into equity. Post conversion into equity, in 18 months, a financial institution needs to sell the equity by bringing in a new project sponsor, thereby recovering its investment. The RBI has granted a standstill period of 18 months, keeping in view that banks do not have the expertise to run and revive the projects.

In this context, banks may be encouraged to form specialised entities - like a special situation fund - to manage the equity stake acquired through debt conversion in distressed assets and till such time, the five-year standstill period may be considered against the existing 18-month time frame. Such a fund shall have the flexibility to develop in-house expertise and invite investors. During the standstill period, the asset should be immune to past statutory dues. There should be a provision to convert the remaining equity with the erstwhile promoter into unsecured loans/other instruments that can be subordinated to lenders' dues. Such an equity may also be written down. This will give an incoming promoter full management control/operational flexibility so that he may take progressive decisions without interference.

In several cases, even with the best intention of the sponsor/promoter, the project/asset becomes an NPA due to reasons beyond its control, such as delays in land acquisition, government approval and judicial pronouncements. In such cases, the financial sponsor, after necessary due diligence, should involve the existing promoter/sponsor and complement this with a competent professional management team.

Today, asset reconstruction companies (ARC) are facing challenges in terms of the capacity and expertise required to handle the growing stressed assets portfolio. The RBI should allow specialised financial institutions like infrastructure finance companies and non-banking financial companies that have adequate expertise in managing assets to acquire and deal with stressed assets.

The current economic tsunami has burdened the Indian financial sector with a huge amount of NPAs, where proactive intervention of the government is imperative for resuming economic growth. In 2008, the US government quickly assessed the impact of the financial crisis and launched the Troubled Asset Relief Program (Tarp) to buy stressed assets and equity from financial institutions in order to strengthen the financial sector. It bought stressed assets worth close to $426.4 billion, which helped the financial sector to recover quickly. In 2014, Tarp sold all its investments for $441.7 billion, thereby ending the programme without making any loss. The Indian government needs to look at creating an India Revival Fund along similar lines to help the country's financial system tide over the tsunami.

The Indian government needs to be complimented for creating the National Investment and Infrastructure Fund (NIIF). I am sure the NIIF will play an active role in providing the necessary capital to assets stuck midway due to lack of equity. This will help the banking system to reduce their NPAs and resume lending to revitalise growth.
The author is vice-chairman, Srei Infrastructure Finance Limited