Uday Kotak predicts more bad loans in SME sector under RBI's new NPA resolution framework

If you thought that the banking sector has hit rock bottom with financial frauds crawling out of the woodwork while bad loans continue to pile up, the head of India's fourth largest private bank has bad news for you. "At this stage, the belief is that a lot of the challenges in the banking system are essentially on the large businesses. I think, we have also a pretty sensitive underbelly of the SMEs business, which has not fully revealed its hand yet," said Uday Kotak, Executive Vice-Chairman and Managing Director, Kotak Mahindra Bank, at a recent event organised by the bank. "The underwriting standards in that also will come up for question as we go down this path of much-faster disclosures being required by RBI, including one-day overdue. The February 12 circular is a significant game-changing event. It will have its implications not only for the big guys, but also the SMEs."

Last month, the RBI completely revamped the NPA resolution framework. It not only ditched all its past schemes for dealing with bank bad loans, like Strategic Debt Restructuring Scheme, but also implemented stricter timelines for implementation of resolution plans. Significantly, for all large accounts - with an aggregate exposure of Rs 2000 crore or more - that were in default on or after March 1, 2018, the lenders would have to initiate and implement a resolution plan within 180 days. Failing that, lenders need to file an insolvency application under the Insolvency and Bankruptcy Code (IBC), either singly or jointly, within 15 days of the expiry of the deadline. Media reports last month had suggested that a whopping Rs 2 lakh crore worth of stressed loans may be headed to bankruptcy court as a result of this new framework.

The new tax regime will likely strain things further. "Earlier some SMEs were playing on the tax arbitrage, which has now gone away due to GST. This will lead some stress in the short term," predicted Kotak.

He also had plenty to say about the nascent IBC/NCLT framework. Describing the sudden twists and turns in the ongoing insolvency proceedings of Binani Cements, which has got a Rs 7,266-crore out-of-court buyout offer from Ultratech Cement, as a one-off one, Kotak maintained that this should be seen as part of the inevitable teething troubles. But he also raised a pertinent question: "Technically, if equity value is positive, if full debt is paid back, the question is do we need to go through the NCLT process at all?"

The bad news is that Kotak believes that major haircuts are in on the cards for lenders, despite sectors like steel where valuations are decent. "Looking at the levels of bloating in the system, we should be happy if 40% of the principal value comes back," he said, adding that further down the road, tougher questions will have to be addressed. Like, given the moral hazards, do we need to tweak the [insolvency] process where we can improve the value?

Neither does he balk at addressing the politically-sensitive issue of bank nationalisation. "In 1969, when we nationalised banks, the purpose was through state-owned banks, we are able to broad-base lending to smaller businesses. Today, bulk of the losses are lending to big businesses, whether public sector or private sector. So, the question we have to ask 50 years or so after nationalisation is, what public interest has been served by running the banking system, both public and private, the way we seem to have done it today," he said.