Given the urgency and the need to tackle the bad loan issue within the banking sector, there can be little debate on the Centre’s attempt to hasten the resolution process. The ordinance that now empowers the Reserve Bank of India to issue directions to banks and set up oversight panels to look into loan recasts, can no doubt iron out some of the key issues with the resolution process. Despite the existing arsenal to deal with stressed assets, banks, particularly state-owned ones, have been non-committal on tackling the NPA issue, fearing backlash by investigative agencies. The RBI spearheading the resolution process with the Centre’s go ahead, and directing banks on the relevant haircut on each account, can no doubt hasten the process.
The need to address the key issue of identifying the portion of debt which may not be serviceable over the long run even if growth revives, cannot be emphasised enough. In the boom years, Indian companies took on significant loans to ramp up capacities. But while debt galloped, underlying assets did not grow at the same pace. An analysis of NSE-listed companies reveals that between 2009 and 2014, while long-term borrowings of companies soared by 30 per cent annually, fixed assets grew by a much lower 15 per cent. Hence in finding ready takers for businesses or while selling bad loans to asset reconstruction companies, lack of concurrence of the serviceable portion of debt has impeded resolution. A time-bound and sector-based approach by the RBI can help assess acceptable levels of haircuts. Vested with more powers, the RBI has already tightened the noose around banks by laying down more stringent norms.
While these are steps in the right direction, several weak links exist. For one, high debt to market-cap levels of a few indebted companies may be a stumbling block for banks to take haircuts. Absorbing huge losses will also be difficult for weak public sector banks, given the Centre’s tight-fisted approach to infusing capital. The RBI can now direct banks to initiate insolvency resolution under the Insolvency and Bankruptcy Code 2016. But with the new code still finding its feet, a quick fix solution is unlikely. The ordinance, however, raises a much larger question, one that pertains to the capability of existing bank managements and the need for the regulator to step into their shoes to run the show. The Banks Board Bureau has done little to improve governance at PSBs. Instead of dealing with the issue of external constraints — as envisioned by the PJ Nayak committee — such as dual regulation by the finance ministry and the RBI, board constitution, etc, the Centre has taken a step back. Divesting them of the autonomy to take commercial decisions does little to instil confidence in banks. Assessing risk and facing the consequences of a poor call is after all fundamental to banking. Perhaps it is time to rethink the unwritten rule that banks should not be allowed to fail.