Open Forum

New Delhi, 30 March 2017

Bad Bank

TACKLE NPAs JUDIOUSLY

By Dhurjati Mukherjee

The top brass of the Reserve Bank of India (RBI) met recently regarding setting up a bad bank, an idea most recently highlighted by Chief Economic Adviser Arvind Subramanian. This would help handle the country’s huge backlog of non-performing assets (NPAs) as well as work on a plan to tackle the State run banking sector’s top 50 bad loans by taking over firms and selling their assets. Though no decision has yet been reached, it is understood that the matter is under serious consideration of the Government.

It must be noted that public sector banks reported a 56 per cent rise in bad loans in 2016. In all, total NPAs, including both public and private, rose to Rs 6.97 lakh crores as on December 2016. The RBI has sought to be form and has been pressing the public sector banks to take over assets and sell these to recover dues instead of negotiating with high profile debtors and agreeing to bail-outs. 

One may mention here, that a little more than a year back, the then RBI governor Raghuram Rajan had scared banks and steel firms alike by demanding that many loans, which banks were passing off as ‘standard’ or normal loans, should be reassessed. The review exercise forced banks to recognise many of these loans as bad debts or stressed debts, requiring these to make provision for more money as security for such loans. It was also found that a section of bankers were shielding these big business houses that had defaulted in payments. 

Rajan had pointed out that a big chunk of NPAs at PSBs pertain to projects that are viable. However, these projects have not gone through to the completion stage for reasons that are mostly extraneous to the project, such as problems in land acquisition or getting environmental clearance. At the same time, with restructuring and additional funding, these can be completed and would certainly create significant capacities.      

Selling these loans to a bad bank, on the other hand, would be a time-consuming process. It would impede fresh flow of funds into these projects. Their debt would rise as the interest rate grows and piles up. Rajan was of the opinion that bad banks were typically intended for situations where projects were not viable. It was found that money was diverted for projects which were not part of the loan agreement with the banks. In fact, though no official figures are available, it can be said that at least 30-35 per cent could have easily repaid their loans as they were not actual defaulters.  

While Rajan was opposed to the idea of a bad bank, his successor, the top brass of RBI including its chief, Urijit Patel, has come out in its favour and in tune with government thinking. Possibly some strictness is needed to give immediate power either to the concerned bank or later to the newly created bad bank to sell assets and recover loans. The terrible legacy in the country of not repaying bank loans must be put to a halt immediately and this can only happen if both the government and the RBI are serious and strict.

It goes without saying that the banks’ pile of bad loans is a huge drag on the economy and a drain on the banks’ profits. Because profits are eroded, the public sector banks, where the bulk of the bad loans reside, cannot raise enough capital to fund credit growth. Lack of credit growth, in turn, comes in the way of the economy’s return to an 8 per cent growth trajectory. Clearly, the bad loan problem requires effective resolution, as early as possible.           

The bad bank idea has, no doubt, problems. A big motivation for floating such a bank is to dress up the PSBs by getting rid of their bad loans. Then, private capital can be attracted to these, perhaps through the sale of small stakes to strategic investors. PSBs would also be able to access the equity markets for funds and would not be as dependent on the government for capital, as we see them. Today’s weaker PSBs can be merged with the stronger ones, the process of which has already started.      

Is there a way in which the positives can be realised without creating a bad bank that itself requires too much capital and is too big to manage? One answer may be to set up a bad bank to deal with NPAs at some of the weaker PSBs, instead of one that picks up NPAs from all PSBs. It would prove less controversial if the government had a majority stake in it. Let us see how the experiment goes.     

This may be complemented with other steps, the most important of which would be for the government to infuse more capital into the better-performing PSBs. Some experts have suggested that an apex Loan Resolution Authority may be created for tackling bad loans at PSBs. The authority would vet restructuring of the bigger loans at PSBs. This would mitigate the paralysis that has set in at the PSBs because of the fear factor and get funds flowing into stalled projects to ensure their timely completion.

Resolution of bad loans and restoring the health of PSBs is among the biggest challenges the economy faces today. It’s a challenge that requires a response on multiple fronts. Simultaneously, the immediate task would be to be extra cautious in granting loans to corporate projects and ensure that these do not become stressed assets in future. 

Moreover, what is critical is that banks have to come out of the influence of political leaders and also powerful businessmen so that these are not in a position to influence loan sanction, specially those that are of heavy amounts. In fact, a large portion of the NPAs could well be said to be because of the politics of getting loans, where the bank doesn’t say a no. 

Banks have to work in a free and unfettered manner and carry out their work judiciously without any bias and pressure from any quarters. Finally, it needs to be pointed out that public sector banks have to become more professional in their approach. And, acquire that competitive edge, which their counter parts have in the private sector.  ---INFA

(Copyright, India News and Feature Alliance)