Financial Restructuring

The lending activity in banking/finance is always considered to be a prime activity with the fact that all the banks/financial institutions have been focused on the lending activities.  With the lending activity, the recovery activity is also equally important but with the increase in the business activity i.e lending, the recovery sometimes lag behind. To cope – up the recovery percentage, the thrust is again on increasing the business i.e. lending, so that the recovery (outstanding) in terms of the business still remains low in terms of percentage.

Thus with the prime focus to keep the percentage losses low, Banks/Financial Institutions focuses on more and  more lending but, eventually it also leads to increase in the loses i.e. outstanding amount.  Finally, to get rid out of it once and forever, the financial institution resorts to various type of restructuring of the outstanding amount, so that the percentages are still maintained at an acceptable level.  Thus, all the banks and financial institutions adopt various recoveries mechanisms/intruments and restructuring transaction, whereby with the involvement/ participation by some third party/entity, the outstanding/receivables from the money lent is restructured.  Such outstanding/receivables are sometimes classified as non-performing assets (NPA).

With the growth of banks and financial institution in India and with the increasing tend to increase the lending to keep up the pressure of the marginal recoveries, it is known that as on date,  gross non-performing assets (NPAs) of 40 listed banks in India crossed the Rs 10 lakh crore. Ten out of the 40 listed banks accounted for nearly 70% of the total gross NPAs according to the market sources/studies and various competent authorities. The State Bank of India at 22% has been the largest share in the total gross NPAs of the 40 listed banks. Next is Punjab National Bank, followed by Bank of Baroda, Central Bank of India and so on. There are lot many accounts, which are on the verge of slipping in to NPA. In banking terminology, it is being called as potential NPA. According to RBI Potential GNPA and restructured loans of all banks put together is approximately 14 Lakh Crore.

RBI has come-up with a concept of SMA (Special Mention Account) for early recognition of financial distress of company, S4A and IBC (Insolvency & Bankruptcy Code) which may help in resolving the NPA. Other than this there is a huge number of nonperforming assets in NBFCs and restructured loans of PSU & Private banks. According to my estimates, all put together number will be much more than shown and declared and is expected to be as high as 2X.