NPA war gives bankers hope but questions remain

They welcome the new powers to RBI but have questions

With the central government giving more powers to the Reserve Bank of India (RBI) on handling loans gone or going bad, and the latter coming down heavily on banks that delay on the resolution process, there is a new expectation among bankers.
 
They are hopeful that loan recovery would see a radical change. However, important questions do also remain, that will have to be answered.
 
Gross bad debt in the banking system as of end-December was about Rs 7 lakh crore. Adding other restructured assets, the stress rises easily up to Rs 10 lakh crore.
 

Those from large banks, which usually have more share in a consortium loan, sound happy on seeing RBI taking the driver’s seat on recovery. They’re particularly happy that the ‘Prompt Corrective Action’ mechanism, aimed at preserving the economic value of a stressed asset by timely action, has been expanded. This has been done to other modes of restructuring and on the Joint Lenders’ Forum (JLF) mechanism.

 
Beside, the central bank has said, once a bank agrees to a common resolution process, it cannot delay on implementing those decisions. And, it is now enough if half of a consortium’s members agree on a resolution process, against the previous rule of at least 60 per cent.
 
“It is always the case that whenever a JLF proposes a resolution path, bigger banks accept those within three-four months. But, smaller banks, might may have tiny exposure, would drag it for a year, and still not agree to the proposals. The entire mechanism was heading towards failure because of them,” said a senior with a large bank, who did not wish to be named.

 
Usually, the delaying tactic was by sending junior members to meetings, lacking the authority to sign on a proposal. The plan would then get buried in red tape. On Friday, all this was struck down. RBI has said representatives to a JLF meeting have to be sent with the authority to agree on a resolution. Once a plan has been signed, all banks will have to get it done in a time-bound manner. Else, tough penalties.
 
Bankers welcome this. Nobody would dare antagonise the regulator, they say. “Banks, earlier, had no single integrated view of the borrower. Now, it will all be under one uniform view that would be driven by the regulator,” said R Kannan, head of corporate performance management functions at Hinduja Group.

 
He feels in this new form, banks can recover 50-75 per cent of all bad assets. “When a company borrows, bankers take adequate cover for the loans. The problem arises when the company defaults and interest components get added to that and the loan amount becomes huge. But, the principal in most cases is protected for banks; if they want to recover these dues, they easily can,” said Kannan.
 
He also does not think a lack of buyers (for stressed assets) is an issue. “There is huge interest in Indian assets from people abroad. Particularly after demonetisation, the feeling abroad is that transparency has increased in the country. Pension fund-backed entities, investors from China and other parts of the world, non-resident Indians… they all want to come to India, to pick up cheap assets. It is a myth that there is no buyer.”

 
Many bankers largely agree with this assessment. On Friday, ICICI Bank’s managing director, Chanda Kochhar, said getting a buyer was not much of a problem but making bankers agreeing on a resolution process was tough. This often derailed the whole recovery plan.              
 
However…
 
Nevertheless, there remain questions that need to be clearly answered. For example, bankers will now be protected from investigative agencies if their decisions go wrong in a loan recast. Oversight committees, or overseeing committees (OCs), would advise banks on loan recast. These, in all probability, will have resolution specialists, rating agency executives, senior personalities in finance and members from RBI and the government. But, what happens when the OC members themselves are questioned by investigative agencies?

 
“This is one more step in the resolution process, not ‘the’ step. There cannot be a ‘the’ step. By putting the new rules, the government has shown it is serious about the NPA (non-performing asset) issue and wants to do something. They have also shown that they will not offer any differential treatment to the borrower, that no political patronage would work,” said Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services.
 
The government has established this by giving a general order and leaving matters to RBI. “If the government knew the whole answer, it would have spelt it out by now. The answer is not there with the government, as well as the regulator, as of now,” Parekh said.

 
There are questions about whether RBI itself has enough bandwidth to manage the resolution process. The central bank must now have expert resources on resolution mechanism, restructuring, sector assessment, legal issues, accounting, taxation, business management, etc, before it can really guide banks in a total resolution process.
 
For that, the central bank has to know why the earlier schemes largely failed. “The Reserve Bank’s role now doesn’t stop at supervising. Now, it will also have to give directions. Building the capacity at RBI for that will perhaps take a long time,” said Parekh.
 
Experts and bankers are divided on the liability of the OC members. Some say that as it is not going to be a government body, the Prevention of Corruption Act would not apply to these committees. The Central Vigilance Commission has not much jurisdiction on a private body. But, some also say, the judiciary can easily raise questions on the resolution mechanism if it should go wrong. In which case, members won’t be as free to take harsh decisions as are expected. “There are questions that need to be answered. And, those answers will have many nuances, and will reveal themselves over a long time,” Parekh said.