Millennium Post

Another shot at resolving NPAs

In response to growing public clamour against rising non-performing assets (NPAs) in the banking sector, the Centre has reportedly decided to amend Section 35 of the Banking Regulation Act through an ordinance to implement a scheme that would purportedly resolve stressed assets in the banking system. On December 31, 2016, the total stressed assets of scheduled commercial bank, stood at a staggering Rs 9.64 lakh crore, according to results published by the Ministry of Finance. At the receiving end of these NPAs or bad loans are the public sector banks. Although the details of that ordinance are not available to the public, reports indicate that the amendments seek to give the Reserve Bank of India more powers to directly "intervene in settling bad loan cases" that the banks are stuck with, according to a Mint report. At the time of publication, the ordinance is still with President Pranab Mukherjee, who is expected to sign off on these amendments. A significant portion of the bad loan problem in India is confined to 50 large loan defaulters. The Centre is also planning to set up oversight committees to aid bankers in prevailing over concerns of their decisions being investigated by government agencies. Once again, reports suggest that Central bank officials will form a part of these oversight committees. Of course, without the full details, it's hard to arrive at definite conclusions of what these measures might entail. Prima facie, however, one might be tempted to raise questions of conflict of interest, considering the Central bank's involvement. In an ideal situation, regulators must stay away from involving themselves in the commercial decisions of the enterprises that they seek to regulate. Moreover, as the recent Mint report pointed out, RBI employees are also "governed under the same rules engagement as other public sector employees". How would Central bank employees be free of the same constraints that encumber public sector employees in banks without adequate amendments to the Prevention of Corruption Act?

Bankers, especially those in the public sector, have long sought immunity from prosecution for decisions taken on loans in "good faith". Recently, the Central Bureau of Investigation had infamously arrested former officials of the IDBI banks for sanctioning massive loans to Kingfisher Airlines—the now defunct airline of former liquor baron Vijay Mallya. Where was the "good faith" in that decision? Such decisions are what left the banking system in such a mess. In a stinging social media post, Mohan Guruswamy, former advisor to the Finance Ministry and critic of the current ruling dispensation, posits that a more sinister plan might be in the offing. "This seems a blatant attempt to make PSU (public sector unit) banks take a clean shave and allow the crony capitalists to get on with their merry ways. Investing money abroad and paying off the netas. Most of the NPA companies are so because their promoters have looted them by inflating project costs and transferring monies to their private and associate entities. The banks must set right the situation by forcing restructure of groups and putting in place of family control professional managements with independent directors. Without restructuring first, giving away huge write-offs is the perpetuation of a gigantic fraud and loot of public deposits. A critical condition to write-offs should be to mandate that those availing of them should never again get PSU bank loans. That's why the Modi regime has chosen the ordinance route without disclosing its intention," he writes. Once again, it's hard to arrive at a conclusion, but one hopes that this not what the government intends. It would indeed be a betrayal of the public's faith if things went down this way. However, what seems certain is that the Chief Economic Advisor Arvind Subramanian's scheme for a 'bad bank' to resolve the NPA problem will not see the light of day. The idea of a 'bad bank' was proposed with the understanding that many of its earlier schemes—Flexible Refinancing of Infrastructure, Asset Quality Review and Sustainable Structuring of Stressed Assets, among others—have not produced the necessary results. Many have posed the argument that under the above schemes introduced by the Central bank too much discretion is left at the hands of banks. Former RBI Governor Raghuram Rajan, however, was never a major votary of the 'bad bank'. He argued that this approach would just transfer the bad loans from banks to another firm. The focus, he argued, should be on how to restructure bad loans. In a bid to turn around stressed assets, the government has set up the Insolvency and Bankruptcy Board of India, besides, of course, passing the Bankruptcy Code through Parliament earlier in its tenure. But as experts contend, the Bankruptcy Code will do little in resolving a significant portion of the current non-performing assets. It is also seemingly why the government may have introduced the recent ordinance.

With a significant amount of NPAs, banks are forced to push up the risk premium, which in other words amounts to raising the cost of lending. NPAs in our public sector banks represent a massive transfer of wealth from the Indian taxpayer to India's business empires. Given the strong bond that exists between major corporate houses and political parties, there is little action against loan defaulters. Politicians and government officials are involved in the decision-making process to grant loans to businesses. Individuals like Vijay Mallya merely represent the tip of the iceberg.
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