Early Warning Signals of Stress in a Corporate

Stress in the world of banking and finance is associated with sign of  incipient sickness in the conduct of business of borrower. To know the concept of  stressed asset in corporate  we need to look back to couple of decades after  bank nationalization. 

In the early ninety’s of last century prudential norms of asset classification and capital adequacy  were introduced in the country under Banking and Financial sector reforms which together with the industrial sector reforms made a paradigm shift from age old banking practice in India. Prior to that in two tranches nationalization of banks took effect leading to fast expansion of banking throughout the length and breadth of the country. The resultant surge of industrial activities in India due to relatively easy access to fund, deregulation in industrial sector and liberal industrial policies and encouragement by way of incentives & subsidy from both the central and  state governments altogether changed the sloth, slow moving underdeveloped  economy to a rapidly growing developing economy.

The resultant economic activities brought sea changes in social sector gradually shifting large chunk of population from agriculture towards micro, medium and large industries. As a natural consequence service sector started growing by leaps and bounds and India freed itself from  dependence of first world country  in matters of food grains, machineries etc.

In the above back drop, banks, more particularly Public Sector Banks which were the only players gradually shifted their preference in urban and metros from trade and small priority sector lending to industrial advances, advances to service sectors and retail lending. 

To regulate the fast growing  banking activity Reserve Bank of India  was focussed towards honest implementation of  income recognition and asset classification, tight provisioning norms and capital adequacy in banks besides the traditional credit management approach. With the formation of separate Tribunal under the prescription of Narasimham Committee for recovery of Non Performing Assets,  the credit discipline from the point of view of lenders and borrowers were satisfactory. The system started wilting with time as there were stiff competition within the banks for sharing chunk of the pie.

In the midst of unhealthy competition among banks inadequate credit appraisals of new industrial and infrastructure advances became a new norm leading to acceptance of small, medium and large advances proposals from dubious entities having little exposure, knowledge and inadequate investible funds with them. The generous approach of banks by way of relaxations in various norms and securities encouraged fly by night operators to encash the opportunity. The unfortunate result of dilution of norms was quick mortality ( means slippage of an advance facility within one year of disbursement). As a result there were unmanageable pile of suits in   Debt  Recovery Tribunal and locking up of bank funds necessitated new enactment SARFAESI Act 2002 to enable bankers to encash their enforceable securities. 

Post Global Financial Crisis in 2008 saw another new development with the introduction of regulatory forbearance by RBI. The asset classification norms were tweaked in restructured accounts to give relief for temporary mismatch in cash flow in the existing economic slow down throughout the world. The bankers, particularly the PSBs allowed all and sundry including insolvents within the facility thus deferring identification of potential NPAs. At withdrawal of the regulatory forbearance there were flood of slippage and the NPA level of all banks and particularly PSBs went to new height not experienced in previous two decades.

Meanwhile, during the last decade RBI felt urgent necessity of implementing stringent credit monitoring mechanism to curb the disproportionate growth of impaired assets and introduced stressed assets concept within the standard asset category based  on period of default in payment of either the principal or interest or for continuous excess of balance outstanding over limit or drawing power or for non renewal of accounts within a definite time frame. Depending upon time period of overdue the stressed assets other than NPA are SMA 0( 1 to 30days default), SMA 1 (31to 60 days default) and SMA 2 (61 to 90 days default). If the default persist on 91^st day accounts turned to NPA. The periodical AQR(Asset Quality Review) of RBI for big advances of Banks to recognise incipient sickness in accounts and prescribe immediate corrective measures is a step towards this direction.

Finally, the Insolvency and Bankruptcy Code 2016 is based on default concept of corporate and has given free hand to bankers to quickly move to the NCLT to save upon time and   value of the impaired assets.