Naming big loan defaulters

Ever since former RBI Governor Raghuram Rajan underlined the need to clear the air over sticky loans of India's public sector banks, the issue has come out of the closet. Earlier, bad debts were usually swept under the carpet and not openly discussed. The banking secrecy laws were invoked, and no actual references were made. No names were disclosed of those who had taken loans and were not returning, whether willfully or accidentally.

Now that seems to be over. There is open talk about those who are defaulting. This in itself is a vast improvement. Or, is it? There might be some lingering doubts about the naming game. There is still diffidence about revealing the identities of loan defaulters openly. Why don't banks publish regular bulletins on loan defaulters? These should be known to the public.

At any rate, just making known the names of large defaulters is not an end in itself. It could just be a byproduct. What was critically needed was a system to follow for recovering of sticky loans or for resolution of these non-performing accounts.

What had happened now is that Reserve Bank has put in place a particular mechanism for resolutely tackling bad loans of PSU banks so that at the level of individual banks there is now no scope for hand-wringing. Banks have often expressed their inability to take effective actions against loan defaulters. It is the Central bank which is intimately involved in the process of settling overdue debts and therefore, there is now a mechanism for collective responsibility for recovery or settling of bad debts.

This is a good deal of improvement. The new process for recovery and resolution of bad debts was kicked off with the amendment of the Banking Regulation Act empowering the RBI to issue directions to banks to initiate insolvency and bankruptcy proceedings against large defaulters. Following this, decisions regarding recovery and resolution of bad debts and non-performing assets were put as if outside the discretion of individual banks by instituting committees or bodies which were to act independently of individual banks.

In fact, directions of these oversight committees and agencies had to be now mandatorily implemented by the banks, and any non-implementation of their decisions would attract "enforcement actions". This is important because earlier banks would often hesitate to take decisions because their actions would come under question in future and their basic honesty questioned. Why?

This is because any settlement of a loan account which had gone sticky or failing to repay due interests and principal amounts would involve some mode of debt restructuring. These could also require haircuts for the banks and forego some portions of loans under Strategic Debt Restructuring (SDR) schemes. Careful external consideration of such packages for loan restructuring could absolve the bank managements of any irregularities. RBI involvement could also give that imprimatur to the whole process.

Now that a clear procedural and administrative set up has come into place, the identified defaulting accounts should be vigorously pursued. While earlier the mounting bad loans portfolio looked formidable, careful examination indicates that with a clear focus it should be possible to bring down the burden relatively fast.

The Reserve Bank has already constituted its Internal Advisory Committee (IAC) to large stressed accounts. In its first meeting on June 12, the IAC had identified the twelve such debts which together account for a quarter of the total NPA portfolio of the banking system. Insolvency and bankruptcy proceedings are to be started against these accounts immediately. Quick resolution of these twelve cases would thus bring down 25 per cent of the NPA burden. That is a significant improvement, no doubt.

But it is equally important to realise that bad loans do not recur in future as well. Surely some loans would go bad, but all preventive measures should be taken well in advance against loans going bad. Once again, these matters were raised by the former governor in his numerous public speeches and addresses to bankers.

Earlier, the lion's share of bad debts originated in a handful of core and infrastructure industries. Bank managements mostly did not have the necessary project evaluation talent to assess the risks associated with large projects. They need engineers, accountants and technical staff which they cannot hire laterally. These flexibilities have to be brought into the functioning of public sector banks, and Dr Rajan had underlined these shortcomings. He had particularly recommended "campus recruitment" of talented youngsters to give that edge to public sector banks. Again, giving loans for industrial projects were fraught with downside risks. These range from land acquisition to getting clearances from governments. For multi-state projects, contradictory stands of state governments could render a perfectly viable project unviable.

Banks must be aware of these considerations and issues while giving loans for large projects. They are already aware. But this begs the question: it is back to the authorities again. The political authorities must free up public sector banks to make their independent decisions without being breathed down by ministers and ministries. They should be empowered, and their managements need to be trusted as well.