Restructure NPAs but hold guilty to account

The Deputy Governor of the Reserve Bank of India Dr. Viral V. Acharya has stirred up a fresh round of debate on the persisting and growing problem of non-performing assets (NPAs) in the banking system. In a 11-page speech to the Indian Banks’ Association conference on banking technology last week, the Deputy Governor called for “being balanced and creative, holistic and uncompromising” to “decisively resolve” the stressed assets of our banks.

Dr. Acharya minces no words in describing the problem staring at the banks and the economy; at various points in the speech, he speaks of “a certain sense of urgency”, of consequences as “pernicious”, of being “at the crossroads” and of festering wounds that “could result in amputation of healthier parts of the economy”. 

None of this is an overreaction. Dr. Acharya has now offered “some surgical restructuring” with a plan focussed on key elements like: letting the price of restructuring be market-determined, restructuring with a focus on efficiency and viability of the restructured assets and participation of both the private sector and government in the process.

Model I (for sectors like telecom, metals, etc. with economic value in the short run) proposes to place these restructured assets under a few or one Private Asset Management Company (PAMC), which would resemble a large private-equity fund run by a team of professional asset managers. Model II (for sectors like power with longer term concerns) proposes that the assets be quarantined under a National Asset Management Company (NAMC), a quasi-government effort to manage the assets and raise new finance.

We do not know if Dr. Acharya’s views have been discussed within the government but they come soon after the Economic Survey, which also suggested “a centralised Public Sector Asset Rehabilitation Agency.” To that extent, this could be a signal that the government is contemplating action along these lines.

But the feasibility of the plan offered here, given its tough timelines (a proposed restructuring of 50 largest cases by Dec. 31, 2017) and the fact that the Deputy Governor says the plan will work if accepted only in toto, remains in question. The solutions offered may have worked in international scenarios, but the Indian context is different and complex.  For an example, on the issue of recapitalisation of banks, the Deputy Governor has suggested private capital raising, asset sales and mergers coupled with some “tough love” from the authorities in terms of not allowing a growth of deposits or lending for banks that remain undercapitalised.

With India’s large public sector banks, there are complex issues linked to unions, the role of these banks in taking banking to the masses and going all the way to a political view on PSUs. Dr. Acharya personally is known to be not in favour of State ownership of banks, and that can take the case for a resolution as offered by him down to another set of arguments that may not find much favour.

Dr. Acharya argues that restructuring must come with the proviso that “the promoters, however, would have NO choice as to what restructuring plan is accepted, and may potentially get replaced and/or diluted, as per the preference of and depending on the price at which the new managing investors come in.”

The well-emphasised “NO” in terms of the choices allowed to promoters highlights the simple fact that promoters have had an easy ride all too often in the Indian system. In fact, Dr. Acharya himself alludes to this when he says: “Promoters have continued to operate, staying afloat with rollovers from banks which only increase indebtedness, partly disengaged, partly disgorging cash from the few assets that are running.” A logical argument flowing from this is that the promoters should be held to account and the State must enforce this accountability well beyond the simple fact of allowing them to walk away – at worst the promoter (”who rarely put in any financing”) may not stay or stay with a reduced stake under Dr. Acharya’s plan.

This is simply not good enough.

One of the biggest issues and indeed causes of NPAs is that the Indian system has not been able to apportion responsibility for actions that made no business sense and have been signed by bank officials and promoters, each clearly motivated by concerns well beyond the imperatives of the business sought to be financed. After all, the speech also notes that the very cause of stressed assets have been “an outcome of excessive bank lending, en masse, in a relatively short period from 2009 to 2012, and to a concentrated set of  large firms in a number of sectors such as infrastructure, power, telecom, metals (iron and steel, in particular), engineering-procurement-construction (EPC), and textiles.”

It is true that there are a host of reasons why this happened but one important cause, a cause that must not be lost sight of and should be a core part of resolving NPAs must be to place a high premium on calling out those who have played with public money. This accountability has to be at a level far higher than just taking away some of the promoters stake or offering a shield to banks against vigilance inquiries – yet another suggestion of Dr. Acharya.

Any attempt to turn away from his simple but glaring reason and hiding in technicalities is fraught with problems – it signals that you can get away with murder and is in that sense an invitation to commit more murder. If we are to break the vicious cycle of “a perennial need of recapitalisation (of banks) from its principal owner, i.e., the government,” then it is important to separate out cases of businesses that have run into rough weather from people who contributed to taking the business into rough waters. So regardless of the plan to restructure, a forensic audit and an eye on accountability must go alongside. If that takes time, so be it because that is an important part of ensuring that such mistakes are not repeated.

(Dr. R K Pattnaik is Professor, SPJIMR. Jagdish Rattanani is Editor, SPJIMR)