Non Performing Assets in

Banking Industry in India

Presented By:
Divya Jain (24)
Onkar Khude (33)
Jerin Shahji (56)
Prana Mathur (134)
Amey Patale (143)
 NON PERFORMING
ASSETS

• Classification for loans on the books of financial institutions

that are in default or are in arrears on scheduled payments of
principal or interest.
• According to RBI, terms loans on which interest or instalment
of principal remain overdue for a period of more than 90 days
from the end of a particular quarter is called a Non-
performing Asset.
 REASONS FOR RISE IN
STRESSED ASSETS
• Domestic and Global Economic • Lack of appraising skills for projects
Slowdown that need specialised skills resulting in
• Delays in statutory and other acceptance of inflated cost and
approvals especially for projects under aggressive projections
implementation • Wilful default, loan frauds and
• Aggressive lending practices during corruption
upturn as evidenced from high
corporate leverage
• Laxity in credit risk appraisal and loan
monitoring in banks
• NPAs at Indian banks
jumped to 7.6% of their
total assets in March
2016, up from 5.1% in
Sept 2015

• In Sept. 2015, the top 100

borrowers accounted for
2.9% while in March
2016, they accounted for
19.3% of the bad loans.
 RBI’S APPROACH TO DEAL WITH NPA’S

 Creation of the CRILC (Central Repository of Information on Large Credits)

database-
 Issuance of detailed guidelines on a framework for revitalising distressed assets
• Joint Lenders’ Forum (JLF) • 5/25 scheme
• Corrective action plan (CAP) • Strategic Debt Restructuring
• Refinancing of project loans scheme
• Sale of NPAs by banks
 Asset Quality Review-
• List of close to 200 accounts was identified, which the banks were asked to
treat as non-performing.
• Banks were given two quarters, October-December and January-March of
2016 to complete the asset classification
 Asset Quality Review
(NPA Recognition)
Requirement of AQR
• Asset classification was not being done properly
• Banks were resorting to ever-greening of accounts- Banks were
postponing bad-loan classification and deferring the inevitable
Impact of AQR
• Gross NPAs have surged from Rs 349,113 crore in September 2015
when the RBI ordered the asset review to Rs 590,772 crore by
March 2016
 Bank Re-capitalization
(Mitigate problems due to NPAs)

Bonds Bonds Purchase

Issue of Bonds

Savings and Public Sector

Government Banks
Deposits

Purchase Capital
of Equity Equity Infusion
Need for Bank Re-capitalization
High Stressed Assets
01 Higher stressed Asset ratio of PSB’s in comparison
to privates sector banks reducing capital base

Financing Growth
02 Requirement of funds to finance priority sectors
including agriculture, and ensuring availability of credit

Regulatory Requirements
03 Basel III requirement of capital to risk weighted asset
ratio at min of 8%, RBI requirement of 11.5 %

Recognition of NPA’s in books

04 NPA recognition as losses in books with capital
replenishment
 Impact of Bank Re-capitalization

Increased Government Holding

01 Increased Govt. holding and Dilution of Public
Shareholding, Investment instead of going for
Disinvestment.

Loss to Tax Payer’s Money

02
Instead of Social Welfare, money is used for
writing off some of willful defaults

Marketability?
03 In case bonds are not marketable, these will
remain in bank books and will hurt lending in
future
 Prompt Corrective Action Matrix by RBI
(NPA Avoidance)

Area Risk Threshold 1 Risk Threshold 2 Risk Threshold 3

Between 5.125% and Between 5.125% and
Capital Ratio 6.75% 3.63% Less than 3.63%
NET NPA Between 6%-9% Between 9%-12% Greater than 12%
Return on Negative for consecutive Negative for consecutive Negative for consecutive
assets 2 years 3 years 4 years
• Capital Ratio = (Equity + R.E)/Risk-weighted assets • Net NPA = Gross NPA minus Provisions
 IBC (NPA Resolution)

Why IBC?
Entry Stage

Continuance
1991 Market Based Economy Stage

Closure
Stage

The Insolvency and Bankruptcy Code, 2016 (IBC) is a legal framework in India that is
provisioned for consolidating the existing system through the creation of a single law for
insolvency and bankruptcy.

The IBC was introduced in the Lok Sabha, in December 2015. The Code came into effect in
December 2016.
 IBC (NPA Resolution)
Greater Chance of
Shareholders 180 days
Default CoC Resolution else
/ promoters Resolution
liquidation
 Dirty Dozens
Debt Bid Amount CIRP
Haircut Bidder Current Status
INR Cr INR Cr end date
Bhushan Steel

CoC approved winning bid. Case facing litigation

₹ 56,004 ₹ 35,200 37% 22-Apr-18 Tata Steel
from L&T and employees

IRP: Vijay Kumar Iyer (Deloitte)

Lanco Infratech
₹ 45,000 ₹ 1,500 97% 04-May-18 Thriveni Earthmovers CoC rejects bid. IRP to file for liquidation
IRP: Savan Godiwala (Deloitte)
Essar Steel Ltd
NCLT hearing litigation by bidders. Second round
₹ 49,212 ₹ 33,000 33% 29-Apr-18 Numetal-JSW, Arcelor Mittal-Nippon Steel, Vedanta
of bidding completed
IRP: Satish Gupta(Alvarez & Marsal)
Bhushan Power& Steel
NCLT order reserved on allowing third bidder to
₹ 47,204 ₹ 24,500 48% 22-Apr-18 Tata Steel, JSW Steel, Liberty House UK
participate
IRP: Mahendra Kumar Khandelwal (BDO India)
Alok Industries
₹ 29,525 ₹ 4,800 84% 14-Apr-18 JM Financial Asset Reconstruction Company-RIL CoC assessing bids
IRP: Ajay Joshi
 Dirty Dozens
Amtek Auto Ltd
₹12,321 ₹ 3,100 75% 20-Apr-18 Liberty House UK CoC approved winning bid
IRP: Dinkar V (EY)
Monnet Ispat & Energy
₹10,260 ₹ 2,700 72% 14-Apr-18 JSW-AION CoC approved winning bid
IRP: Sumit Binani (Grant Thornton)
Electrosteel Steels
₹13,345 ₹ 4,500 66% 17-Apr-18 Vedanta CoC approved winning bid. Case facing
Litigation from Renaissance Steel
IRP: Dhaivat Anjaria (PwC India)
Era Infra Engineering
₹10,129 - - 13-Nov-18 NA NCLT started hearing on CIRP after
significant delay
IRP: PwC India
Jaypee Infratech
₹ 9,800 - - 06-May-18 Adani Enterprise, Kotak Realty Cube CoC assessing bids received
Highways, JSW, Suraksha ARC
IRP: Anuj Jain (KPMG)
ABG Shipyard
₹18,129 ₹ 5,200 72% 28-Apr-18 Liberty House UK CoC assessing fresh bids after second
round of bidding
IRP: Sundaresh Bhat (BDO India)
Jyoti structures
₹ 7,625 ₹ 3,000 61% 31-Mar-18 Sharad Sanghai led consortium of HNIs CoC approved winning bid
IRP: Vandana Garg (BDO India)
 Amendments to IBC
1. Homebuyers as financial creditors rather than being just operational
creditors

2. Minimum voting threshold for Committee of Creditors (CoC) from 75% to

66% (key decisions) and from 75% to 51% (ordinary or routine decisions).

3. There has been a provision to allow Micro, Small, and Medium Enterprises
(MSMEs), those of which are not classified as willful defaulters, to bid for
their assets. This will be beneficial in aiding MSME promoters in stressful
times, and will smoothen the loan recovery process

4. There has been a provision for streamlining the bidding process by

disallowing exits and late offers
Power sector
NPAs
Statistics of Power Sector NPA

•34 stressed thermal power projects

•~75000 MW
•Debt – INR1.77 Lakh cr
 • Demand Supply mismatch
• Infrastructural debacle
• Non-availability of Fuel
• Cancellation of coal block
Reasons for • Projects set up without Linkage
Power sector • Lack of enough Power Purchase Agreement
by states
NPAs • Inability of the Promoter to infuse the equity
and working capital
• Contractual/Tariff related disputes
• Issues related to Banks/Financial Institutions
• Delay in project implementations leading to
cost overrun
• Aggressive bidding by developers in PPA
 IBC code
IBC code mandates ‘one day delay in debt servicing as default and find a resolution in 180 days’

Why not IBC??

It will result in sale of stressed assets at heavy discount( INR1cr per MW where the cost of construction is INR
5-6cr per MW)

Power sector debt resolution

Government led route Private sector route One time dispensation

•11 stressed power assets
•12-15 GW capacity
•Debt INR 80000-90000 cr
•SPV creation with equity contribution
from SBI, REC, PFC
•Operation & management of assets
will be responsibility of SPV
•Samadhan Scheme
•Sell stressed assets to private sector
ARCs at 30-40% discount
•Regulators provide dilution of Feb 12
guidelines(Resolution of Stressed
Assets – Revised Framework ) and
allow current promoters to remain in
control and lender covert part of debt
into equity to make debt sustainable
REC-PFC plan
 Project Sashakht
(NPA Resolution)
What is Project Sashakht?
• Government of India had set up a panel led by PNB chairman Sunil Mehta to address the bad loans problem
in India’s banking sector
• The aim of Project Sashakht is to strengthen the credit capacity, credit culture and credit portfolio of public
sector banks
• It proposes a five-pronged strategy to resolve bad loans depending on their size
AMC-AIF Led
SME Approach Bank Led Approach Asset Trading
Approach NCLT-IBC Approach
(Upto 50 crores) (50 – 500 crores) Platform
(Above 500 crores)

• Separate • Banks will enter • Separate AMC • All bad loans • Trading
vertical at bank into a inter to be setup not resolved by between banks
level creditor • Institutional any of the and non- bank
• Loan resolution agreement funding approaches to investors
within 90 days • Lead Bank to through AIFs be transferred
provide to NCLT
resolution
within 180 days
 AMC – AIF Led Approach
An AMC would be set up
Should the asset be purchased
for a higher price by a third
party, that party will pay banks
and repay the 15 percent paid
upfront by the AIF
If no other bidder emerges for
the asset, the AMC will
continue to hold it

Auction to be followed to allow

AMC would raise and manage ARC’s and stressed asset funds
an alternative investment fund to bid for the asset at a price
higher than the floor price

Floor price would be assessed

When a stressed account comes
by the investment committee of
up for sale, the AMC would
the AIF. The AIF will furnish 15
conduct due diligence and
percent of the floor price
recommend a floor price
upfront in cash
 Challenges
• Capital requirement for AMC & AIF
- Currently 200 accounts with exposure of Rs. 500 crore and more
- Total across these accounts is Rs. 3.1 lakh crore
- If we assume 40% recovery then about 1.2 lakh crore would be required to
be raised

• High returns
AIF investors look for at least returns of 20 percent plus in Indian rupee terms.
Foreign investors look for dollar returns of 13-14 percent. So if one has to get
this return, then the pricing is very crucial
Effect on Bank Stocks

An effective & swift mechanism to resolve NPAs is one of the most essential aspects
necessary for improving health of the Banking sector

•Strengthening of balance sheet

•Improvement in lending capacity of banks
•Share price appreciation
•Greater investor confidence