Stressed assets have been rising rapidly in India, mainly in public sector banks. A number of factors can be identified that have led to this situation. These include global slow down, governance related issues, political factors as well as mal-intentions and misconduct. Consequently, significant losses are incurred by the public as well as the Union Government which basically owns public sector banks. The chances of misconduct are substantially large in case of infrastructure project especially under public private partnership. There is need to take this opportunity to undertake extensive research into the factors which have led to deteriorating asset quality in public sector banks.

A significant rise in non-performing assets (NPAs) of the banking system, especially public sector banks (PSBs), is a matter of concern, and the Reserve Bank of India (RBI), Central Government and commercial banks are trying to address the situation. The global slowdown and uncertain market conditions are generally blamed for the grim banking situation. The general refrain of PSBs is that they operate under constraints, are vulnerable to political pressures, and are not on equal footing with private financial institutions as they have to lend to certain segments of the economy in consideration of social responsibilities. However, the trend in stressed assets reveals that higher NPAs are spread-out across the economy, including priority sector. And major stressed sectors are infrastructure, iron and steel, textiles, aviation and mining. Therefore, it would be interesting to examine important causes and reasons to help in correcting the situation.

 In a slowing economy, it is natural to assume that NPAs will increase but the primary cause of rising NPAs may not only be economic slowdown but also deficiencies in procedures followed in extending and monitoring credit itself as there are significant differences in approaches pursued by PSBs and private sector banks (PVBs). This difference in approach can be easily isolated if a common commodity is considered, illustratively, tractor financing where anecdotally, NPAs in PSBs were nearly 50 percent of the portfolio, a few years ago. In addition, there could be at play still more factors like mal-intentions, and/or misconduct by the borrowers, many a times with connivance of the bank staff.

It is not the first time that stressed assets have increased in the economy. In 1994, India had recorded higher levels of stressed assets as a percentage of total advances than in 2015 but with prudent policy was able to tame them. Similarly, in recent times, having recognized the rising levels of stressed assets and sectors where stress is occurring, India can address the concerns in the banking sector.

Despite several existing schemes and interventions by the Reserve Bank of India (RBI), the problem of bad debt has plagued the Indian banking system. For years, various high value accounts have undergone restructurings that have not resolved stress or the underlying imbalance in the capital structure, or addressed the viability of the business.

The existing RBI stipulated resolution mechanism included corporate debt restructuring (CDR), strategic debt restructuring (SDR), change in ownership outside the strategic debt restructuring (Outside SDR), the scheme for sustainable restructuring of stressed assets, etc. All of these were implemented under the framework of the Joint Lenders’ Forum (JLF).

On February 12, 2018, the RBI decided to completely revamp the guidelines on the resolution of stressed assets and withdrew all its existing guidelines and schemes. The guidelines/framework for JLF was also discontinued.

The New Framework

The new framework requires that as soon as there is a default in a borrower entity’s account with any lender, the lenders shall formulate a resolution plan. This may involve any action, plan or reorganization including change in ownership, restructuring or sale of exposure etc. The resolution plan is to be clearly documented by all the lenders even where there is no change in any terms and conditions.