NPA resolution: Nothing new in new mechanism, same old actions, says Moody’s

However, the agency said these measures improve the “efficacy of NPL resolution mechanisms and are a credit positive.”

By: ENS Economic Bureau | Mumbai | Published: May 10, 2017 5:02:48 am
 NPA resolution, Moody, moody ratings, RBI, reserve bank of india, india-NPA resolution, indian economy, india news, indian express Global rating agency Moody’s

Global rating agency Moody’s on Tuesday said the new NPA resolution mechanism are broadly the same as the earlier actions which do not address the lack of capital and the capacity for big write-downs of assets, making the recovery from bad loans a long-drawn process.

Indirectly saying that the measures are old wine in new bottle, the agency said the measures are “broadly along the same vein as a long series of actions that government and regulators have taken to address banks’ asset quality challenges in the past.”

“The measures do not address the lack of capital at the state-owned banks, that has prevented them from writing down non-performing loans to realistic levels. We continue to expect NPA resolution to be a relatively long drawn out process,” Moody’s said in a note. However, the agency said these measures improve the “efficacy of NPL resolution mechanisms and are a credit positive.”

However, Moody’s said successful resolution, either by through debt relief or asset sale, will require banks to take a big hit when they write down the value of these assets to market value. “However, the state-owned banks’ weak capital levels mean that they do not have the capacity to take these sort of write-downs,” it said.

Moody’s said public banks will use their operating profits over the next two years to increase the provision coverage ratios, after which the clean up will begin.

The government last week approved promulgation of an ordinance to amend the Banking Regulation Act, specifically section 35A, in a move towards resolution of the NPA crisis facing public banks. Indian banks are suffering from stressed assets and incurred considerable losses due to mounting bad loans.

NPAs accumulated on the books of the banks amounted to over Rs 6.97 lakh crore as per a CARE Ratings study on bank performance as on December 2016. A large proportion of these NPAs has been caused by the top 50 defaulters and the same has to be resolved at the earliest.

The government announcement was followed by the RBI issuing a notification lowering the threshold for the lenders in the joint lenders’ forum (JLF) to approve a resolution proposal, to 60 per cent from 75 per cent of lenders by value, and to 50 per cent from 60 per cent of lenders by number. The Reserve Bank can now direct banks to initiate insolvency proceedings with respect to specific borrowers who are in default, and can appoint advisory committees to advise banks on the resolution of stressed asset, it said. This, along with the expected improvement in coordination among lenders, make the moves a credit positive.

Earlier, measures like joint lenders’ forums, the 5:25 refinancing, strategic debt restructuring and the S4A or the scheme for the sustainable structuring of stressed assets have not materially quickened the pace of NPL resolution, it noted. Moody’s said the operating environment in stressed sectors continues to be challenging and the market value of such stressed companies is far lower than that on banks’ books.

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