Such has been the concern over the mountain of bad loans with banks that when the Reserve Bank of India, empowered by the new NPA ordinance, went into fire-fighting mode and identified 12 big defaulters for insolvency, the markets cheered, hoping the worst was finally over. The Gujarat High Court’s recent verdict dismissing Essar Steel’s petition and clearing the way for lenders to initiate insolvency proceedings against the company, has also been lauded as a path-breaking move. With bad loans in the banking system threatening to cross the ₹8-lakh crore mark, the urgency with which banks and the regulator have been pushing forth resolution of large accounts, is indeed welcome.
But the damage control is going to cost banks dear. A lack of concurrence on the serviceable portion of debt has impeded resolution. The success of a resolution plan this time around rides on banks’ ability and willingness to right-size their debt, and taking huge haircuts. According to CRISIL, banks may have to take a hit of ₹2.4 lakh crore on just 50 large stressed assets that account for half of the NPAs in the system. India Ratings pegs the bare minimum additional provisioning towards the 12 big defaulters at ₹18,000 crore, eating into banks’ profits by about 25 per cent. Balance sheets could erode further, if the resolution fails and companies go into liquidation, entailing steep haircuts of 80-90 per cent. These mind-boggling numbers beg the question: Will this finally rid the banking system of its bad loan problem?
Not really, unless underlying structural issues are addressed. The RBI’s asset quality review about a year-and-a-half back was touted as a major clean-up, one that would allow banks to start off on a clean slate. Six quarters hence, banks continue to report huge slippages, with some leading private banks that got off with a shorter AQR list, playing catch-up. Realising that there were still divergences in asset classification compared to its norms, the central bank recently issued a circular requiring banks to make suitable disclosures pertaining to FY16. Divergences in some private banks alarmingly ran into thousands of crores of rupees. As a last throw of the dice, the RBI has been forced to dirty its hands and look into loan recasts. It is time to pause and address the structural issues within the banking system. In a bid to deal with the problem at hand, important issues of inadequate credit appraisal systems and shoddy lending practices that caused the problem in the first place, have been ignored. The fact that the RBI had to take it upon itself to clean up the mess and issue numerous directives, highlights the critical governance issues at banks. There is an urgent need to professionalise and depoliticise the governance structure, if past mistakes are to be avoided.