Understanding India’s Twin Balance Sheet Problem: Challenges and the way forward

 

Based on the banking panel moderated by eminent journalist and author Tamal Bandyopadhyay at Gnosis ’17, XLRI’s 8th Annual Finance Symposium consisting of:

Ananth Narayan G. – MD and Regional Head of Financial Markets, Standard Chartered Bank

Jayesh Mehta – MD and Country Treasurer, Bank of America N. A.

Pradeep Khanna – MD and Head of Trading, HSBC India

Madan Sabnavis – Chief Economist, CARE Ratings

Sameer Narang – Chief Economist, Bank of Baroda

The twin balance sheet problem covers two aspects:

  1. Bad assets: The banking system comprises of 9.5 trillion rupees of bad assets.
  2. Overleveraged companies: Debt accumulation on companies is very high and thus they are unable to pay interest payments on loans.

The banking sector in our country is in a conundrum as close to 70% of the banking system is ill. The credit growth has fallen from 15% to 5% over the years. Some stimuli such as Insolvency and bankruptcy code, a 2.11 trillion rupees recapitalisation plan and public sector bank consolidation efforts will help in NPA (Non-Performing Assets) resolution process getting fast tracked but effects can only be seen in the long run.

The Indian banking system should have been prepared for such problems as they have been recurring frequently. There should be stronger pressure on banks to maintain credit quality. A perception has been formed that the public sector banks have contributed a lot to the systemic failure. It is often overlooked that private sector banks have not classified NPA in the right manner. If such failures are occurring regularly as they have been, then the credit delivery system should be made better.

The problem of the banking sector is twofold. First is the lack of effective risk management in the system. Second is the low rate of risk mitigation in India. 45% of lending done by banks is under stress. The resolution process should turn the cycle for hard assets like steel and infrastructure and such that they are converted into performing assets in the future. By 2018, there is a possibility that the whole NPA resolution process will either be resolved or written off completely.

The problem started when in comparison to high bank debt the equity was too small. Another issue is of cash flow gold-plating. If the cash flow from the project is for example, 100 crore rupees then it is gold-plated to make it worth 120 crore rupees. This contributes towards increase in bank debt. There is a need for proper skillsets to analyse if projects are correctly evaluated or not. The firms under stress should be bought out by somebody else at a smaller cost.

The NCLT (National Company Law Tribunal) route to resolution will be effective. The IBC code which ensures creditor-control and establishes a level playing field for both secured and unsecured creditors, will there-by reduce separation between them and reduce implementation problems for recovery.

Out of the 9.6 trillion rupees of stressed assets, recapitalisation will ensure that 35% of provisioning is done which is not enough. After the news of recapitalisation, the markets celebrated majorly due to the government finally acknowledging the problem. To accelerate reforms, long term funding needs to be channelized into the infrastructure sector. The monetary policy framework needs to be reviewed; a more financially stable framework is needed for it to be effective. The prolonged resolution judgement process also needs to be rectified. Currently, the judiciary system required 270 days for complete IBC resolution.

Banks need to look for new markets such as affordable home segment, MSMEs, SMEs etc. There a lot of governance issues in both private and public sector which can only be resolved by effective changes in board.

Aashna Pallav

SIBM Pune

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