Bad debts: Ordinance not enough
When Finance Minister Arun Jaitley announced to newspersons about a new ordinance to empower the Reserve Bank of India to intervene for resolving banks' bad debts directly, many felt that this was the magic wand. Far from it, some would argue.
For practical purposes, the ordinance that gives RBI authority to intervene was already there. As the final regulator of the banking sector, the RBI has on many occasions instructed banks and directed them to take steps about their growing portfolio of bad debts. But bad debts have gone on increasing.
Many already know who all are responsible for the bloating bag of such loans. The Finance Minister had made repeated statements that just about 40-50 large borrowers account for over 80 per cent of these loans. The government had taken a series of steps and passed laws for recovery of these loans as well. Take the stock: six new Debt recovery tribunals have been put in place recently, Insolvency and Bankruptcy Code enacted, Securitisation, and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFESI) passed, and the Recovery of Debts to Banks and Financial Institutions (RDDBFI) has been further strengthened.
Despite all these, bad debts have gone on increasing – both in absolute amounts and more importantly as a proportion of the overall advances portfolio. These have grown more in the last five years than before when many of the corrective mechanisms have been put in place. Then there must be some fundamental economic reasons why these are rising. There must be some lacunae in the legal framework or in the approach why bad debts are accumulating instead of reduction.
There are at least three broad reasons why. The bad debts are rising as a consequence of our overall framework of laws and legal institutions and also in the system as such. If land laws are such that a piece of land badly required for a project cannot be acquired on the ground, then loans advanced for a green field project is likely to getsticky. No amount of debt recovery rules and laws can help in recovering amounts already spent on a project in a doomed site.
Secondly, what happens when the bids of banks to recover their loans are stuck in law courts? An ordinary petition for recovery of a rented property by small house owner can take twenty years and then remain unresolved, then what about complicated cases involving the recovery of crores of rupees. None of the bank cases for recovery of loans is complete, and assets took over, excepting a handful. Out of the total outstanding bad debts of close to Rs 6.9 trillion, the number of property seized and symbolic physical possession taken during 2016-17 was worth Rs 64,519 crore. In 2016, the total amount of NPA reduced was only Rs 37,815 crore.
These facts and figures lead to the third reason why. Take for instance only one law – the Companies Act. Under this law, apparently, the capital of a company cannot be wiped out. If this were possible, a company owing significant amounts to a bank could face a situation when its risk capital is all wiped out, and then the company is handed over to a new investor who recapitalises the sick unit. The effect is that the owner of the sick unit loses all his risk capital and the control of the company which is then handed over to the new buyer who recapitalises.
Under this law, apparently, the capital of a company cannot be wiped out. If this were possible, a company owing significant amounts to a bank could face a situation when its risk capital is all wiped out, and then the company is handed over to a new investor who recapitalises the sick unit. The effect is that the owner of the sick unit loses all his risk capital and the control of the company which is then handed over to the new buyer who recapitalises.
This is the model which was followed extensively in the United States, particularly after the global financial melt-down in 2008. The banks which had booked large losses on their trading or for derivatives instruments had their capital wiped out. The government then stepped in and put substantial funds into recapitalisation (something like some $800 billion) in some of these banks. Later these shares were off-loaded into the market, and the banks returned to private ownership.
The same model was followed extensively in the United Kingdom after the large scale bank failures in that country in the same year. These banks since then have been again privatised through market offers.
Anyway, these are broad outlines of the political economics of bad debts in present-day India. Some of these could be addressed in a short to medium time scale. Some would appear to be un-resolvable even in the long run. But coming to the ordinance as such, this could provide a kind of buffer to banks and bankers in trying to cope up with their bad debts. How?
The banks and bankers have been reluctant to handle the bad debts and resolve these. Any resolution of bad debts inescapably involves a give and take. You have to recognise the reality and, maybe, accept some haircut. The moment there is a haircut –or writing off – of portions of the outstanding loans, eyebrows are raised. Bankers, apparently, had plainly told the government as well as the RBI that on their own they would not do anything of the kind to resolve bad debts and risk vigilance inquiries in future.
RBI's institutional interventions in the process of coming to terms with bad debts could provide that shield to bankers. The new powers include RBI's authority to create some oversight committees to go into bad debts and be remained involved in the formulation of the agreement.
This could then give some sanctity to the process of resolution, and the intentions of bankers in accepting haircuts could not be questioned as a later stage.
Along with these, the bunch of anti-corruption acts also needs to be changed. That is, so long as business decisions – like granting a loan—are taken in good faith without mala fide intentions, the decision-makers should not be questioned. Mistakes might be committed, and the best business decisions could also turn sour. But as long as the decisions are made without receiving any personal benefits or resulting in personal enrichment, these should be honoured against corruption proceedings.
This last step is also an act of trust. But then, in the end, a bit of trust is essential. The entire wider world is not a bad debt. IPA