No easy way out of NPAs

The Banking Regulation (Amendment) Ordinance, 2017 promulgated last weekend is being described as a strong and positive step taken at the highest level to address the burning problem of bad loans in the Indian economy. The government certainly is showcasing it as a bold move to break the paralysis, with the clear message that the alarming state of affairs obtained today cannot continue. As the Finance Minister Arun Jaitley put it, “The status quo can’t continue. And the status quo is that not much is moving.” And when not much is moving, in the case of non-performing assets (NPAs) it clearly means that the situation is deteriorating as banks withdraw, assets slide in value and the cycle begins to feed on itself in a reinforcing loop. Bad loans are now touching the Rs.7 lakh crore mark.

No one explained the situation better than the Deputy Governor of the Reserve Bank of India, Dr. Viral V Acharya, who in an eleven-page note issued in March pointed out that “possibly up to a sixth of public sector banks’ gross advances are stressed (non-performing, restructured or written-off), and a significant majority of these are in fact NPAs.”  There are also banks in “the worst shape”, where the share of assets under stress has approached or exceeded 20 per cent. To appreciate how much this monster has grown, note that the estimate of stressed assets has doubled from 2013 in terms of what had been recognised by banks. Clearly, this is an epidemic that will bring the house down with it.

Seen in this context, any attempt to shake up lenders and their creditors from their stupor and force a special solution in a special context is welcome. But it may be just too soon to say the ordinance will provide a way out of a complex problem that has grown to have linkages way beyond the souring of individual transactions. In fact, this is not the first time that the banking sector is faced with rising NPAs. It’s just that the current cycle has run on far too long and grown in magnitude beyond any known before – but some of the core causative factors are no different from what we have seen in the past.

Addressing this will call for a recognition first of the fact that the banking system and the regulator already had the duty and the responsibility to see that this was coming as well as enjoyed the powers to have acted to bring it under control. Consider Section 35(A) of the Banking Regulation Act, 1949, the very section that has now been fortified by inserting two new sections, which already empowered RBI in public interest “to issue directions to banking companies generally or to any banking company in particular and (they) shall be bound to comply with such directions.” This is as broad based as it can be, leaving no one in any doubt that the RBI could and should have acted or at least raised enough of an alarm on the growing menace.

The two sections now inserted (35AA and 35AB) enable the government to authorise the RBI to direct banking companies to resolve specific stressed assets by initiating insolvency resolution processes or committees to advise the process.  This is nothing more than pinpointing on a broad canvas on which the RBI always had the power to paint. It is no surprise therefore that the RBI, too, has been blamed, notably by the Parliamentary panel on finance, which way back in February last year recorded in its report that the RBI hasn’t “quite succeeded” in enforcing its rules. Worse, the committee also recorded that willful defaulters at the time owed PSU banks a total of Rs.64,335 crore or 21 per cent of the NPAs.

This remains one of the most pernicious causes of bad loans in a system where promoters using their power and influence are often able to swing deals of the kind no banker should allow in the first place.  Therefore it is particularly unfortunate that the ordinance is being described as a means of providing cover to bankers to act and resolve specific cases without the fear of any inquiries or investigations.

In question are large sums of public money and while it is good to do everything to get the business rolling and the loan accounts performing once again, no effort must be spared to separate willful defaulters, corrupt bankers, political masters and other thugs who have played no small a role in giving us a crisis of this magnitude. Any attempt to push the dirty deals under the carpet will signal that this is business as usual, that here is one more attempt to cover up rather than genuinely clean the books and the same players will come back soon in another garb and the vicious cycle of NPAs will continue.

Also to be noted is that there are structural issues in loan disbursement which need to be addressed. Moreover, the regulator is now entering at the end of the cycle, which isn’t really very helpful. Due diligence is required at the beginning of the disbursement process at the level of the bank boards, which have representatives of the RBI and the government present. No loan is non-performing at the beginning of the cycle but a lot of the seeds are sown at these early stages as well.

Now that the ordinance is a reality, it must be accompanied by a high level of transparency. All instructions, timelines and parameters of the deals should be made public and every single large ticket NPA must necessarily be subject to a forensic audit, which is precisely what the parliamentary panel (which incidentally also had Dr. Manmohan Singh as its member) suggested. This should not be allowed to become a political issue. It’s an issue of national importance, impinging on the future of the Indian economy and those who have milked the system should be separated for exemplary punishment. 

(R K Pattnaik is Professor, SPJIMR. Jagdish Rattanani is Editor, SPJIMR. Views are personal)