Stressed Accounts: Challenges in Restructuring/Revival

Once an account enters into stressed by way of SMA0, SMA 1 & SMA 2 and then doubtful, substandard and Loss account, the journey is too short and it is like a milking cow getting old and useless . The situation and condition for that matter worsens too fast. It does not take more than 9-12 months before account totally branded as NPA.

A stressed account needs immediate attention and lot of care to handle otherwise and mostly it ends as a loss account with no hope to revive. After some legal battles, the units goes in the hands of typical businessman who deals in scraps. It is really quite painful to see a unit being grounded which till very recently was centre of activities.

There are few options left once the account is in stress depending upon the business potential, asset value, promoters’ confidence in the business and lenders’ trust in the promoters. While disposal of the unit is quite easy and there are many agencies who are expert in that, few cases are revived with lot of efforts. Revival or Restructuring is quite common at the first stage in our Indian banking system but this is not without hurdles and challenges. Let me share my views on these challenges, which you may have also experienced:

      1. Acceptance of Revival /Restructuring Plan: In most of the cases first draft of revival plans  is always rejected by the bankers/lenders.   Lenders take lot of time 3-6 months to give patient hearing to revival plans unless there is some time constraint. The revival plans also get delayed due to impractical approach of the lenders and the borrowers both. Lenders often don’t look at the plan with practical approach , rather they are more concerned with the set banking norms which have already failed in such cases. Borrowers too feel that this is one more opportunity to screw the banks further and demand as much as possible from lenders.  By the time both sides come to the reconciling stage it is delayed by 6-9 months. This delay causes highest damage to the bleeding borrower.

     2.  Infusion of Funds by Lenders and the Borrower: Once the revival plan is accepted, the commitments of additional funding made by both the sides  become one more challenge. Borrowers find it too difficult by this time bring in additional funds in the business which is either not there or stuck up somewhere. Lenders too take long time in convincing themselves to infuse funds. In many cases , it is noticed that such addition commitments  by the lenders never come in the business and it is adjusted against interest and other dues already outstanding or to be due in near future. To keep their record clear the lenders defer such infusion .

        3. Valuation and Viability:  Although the valuation of asset is always done by the empanelled valuers, it is quite commonly noticed that valuation at the time of borrowing is much higher as compared to the valuation while restructuring the loan. It is beyond my understanding why the lenders don’t get the three type valuation (Market value, realizable value and distress value) while lending. Why it should be made compulsory that the lending should be done considering the distress value as one of the factor. Further another key issue is the viability of the unit for revival. This is also done by the empanelled agencies but the studies are not carried out properly. The delay and misconception can lead to wrong decision.

        4. Over commitment by the Borrower: Biggest  challenge in the revival is the over commitment by the borrower who is more interested to buy time . Very few cases have seen the timely fulfillment of commitments by the borrower made in revival.

     

      In my view, both the lenders and borrowers try to pass on the bucks and buy time so   the problem is passed on to some more months. If proper revival plans are prepared with honest intentions, there will be great possibility of revival. Also the timely decision by the lenders can help the stressed account to revive. In last one year RBI has come out with two major schemes i.e. 5/25 and SDR. It is working on some more steps to handle the situation of stress accounts but success will be only when both sides understand the situation properly and timely. RBI should consider the views of the entrepreneurs without blaming only to them, similarly lenders should also improve their accountability system and make good use of the tools available with them to handle stressed accounts.  Sometimes a cow can be ill which does not mean it can’t be cured. Lenders are major financial partners and have all authority over the borrower but this brings lot of responsibility on them.

    

    Friends, I never intend to side the willful defaulters or fraudsters but believe that sometimes lenders are party to such defaults and hence to some extent responsible for such situation.