Why not give the capital directly from the Budget instead of following a circuitous route, setting up new institutions and adding to administrative and overhead costs?
In the Union Budget for 2021-22, Finance Minister Nirmala Sitharaman has proposed setting up of a bad bank. Crafted as an asset reconstruction company (ARC), it will bundle up all the non-performing assets (NPAs) of banks, buy these at a negotiated (albeit discounted) price and sell them to investors such as private equity funds, alternative investment funds (AIFs) and so on, by putting a turnaround plan in place. An asset management company (AMC) will work on a detailed turnaround-cum-execution plan.
The banks plan to transfer nearly Rs 2,00,000 crore of bad loans to the ARC. Every loan (albeit bad) account involving Rs 500 crore plus will be considered for transfer. In return, the ARC will provide 15 per cent upfront cash to banks and issue security receipts for the remaining 85 per cent, to be guaranteed by the Government. The ARC will require a capital infusion of at least Rs 10,000 crore. A majority share holding in the entity will be held by public sector banks (PSBs); though some private banks will also be involved.
According to the 22nd Financial Stability Report (FSR) released by the Reserve Bank of India (RBI) on January 21, the gross NPA (GNPA) ratio of all scheduled commercial banks (SCBs) is projected to increase from 7.5 per cent in September 2020 to 13.5 per cent by this September. Even as the Coronavirus pandemic gripped the economy from the beginning of March 2020, its impact on the bad loan scenario did not reflect till September 2020 in view of the RBI’s decision to grant moratorium on loan repayments (March 1-August 31, 2020) and exclude the moratorium period for the purpose of declaring an account as an NPA.
Meanwhile, the Government had made an amendment to the Insolvency and Bankruptcy Code (IBC) to ensure that proceedings against bad loan accounts by the National Company Law Tribunal (NCLT) are not initiated until March 24 this year. Once this embargo is removed (for now, the powers that be are in a wait-and-watch mode but they will have to decide sooner than later), there will be a spike in NPAs as then the banks will be forced to reflect the real position. This is what worries the Finance Minister.
Having already infused close to Rs 3,00,000 crore of capital in PSBs during the last four financial years, and given its precarious budgetary resources, the Government is in no mood to pump another Rs 2,00,000 crore or so needed to prevent erosion in their capital. At the same time, it wants to unshackle the banks from the burden of bad loans so that they are in a position to increase credit availability required for achieving 11 per cent plus growth during 2021-22 and put the economy on a sustained growth path of seven-eight per cent till 2025-26.
To wriggle out of this dilemma, Sitharaman has resurrected the idea of a ‘bad bank’ that was mooted in 2018 by a committee under the former Chairman, Punjab National Bank (PNB), Sunil Mehta, to be named ‘Sashakt India Asset Management’ for fast-track resolution of large bad loans. In May 2020, this was reiterated by the Indian Banks Association (IBA) with a stipulation that the Union Government should anchor the bad bank with majority equity holding. Accepting this proposal would have meant that eventually, the responsibility for handholding would have come on the latter. Therefore, the Finance Ministry rejected that suggestion outright.
Under its new incarnation, the bad bank will be majority owned by PSBs which tantamounts to ownership and control vesting with the Government itself — though indirectly. But the more crucial point is that the security receipts issued by the bad bank to cover 85 per cent of the transfer value of the loan will be promised sovereign guarantee. As a result, while on one hand, the banks’ balance sheet will be fully shielded against any default in redemption on maturity (they need not make any additional provision which otherwise would have been required as per the RBI’s circular dated September 1, 2016), on the other hand even the bad bank need not worry too much about recovering it.
If it is unable to recover, then also the guarantor (the Government of India) will pay up. In short, the bad bank has been crafted in a manner such that it will be a win-win for all stakeholders like the banks, the bad bank, defaulting borrowers and so on, except the taxpayer whose money the Union Government will eventually be using for bailing out the banks.
If, that is the real intent, why not give the capital directly from the Budget instead of following a circuitous route, making things non-transparent, setting up new institutions and adding to administrative and overhead costs?
It is ironical that each time banks are faced with erosion in their capital due to delinquent borrowers, the Government takes recourse to cosmetic solutions that are often laced with fancy nomenclature to make them look credible. This approach should be abandoned. Instead, it should adopt and build on sustainable solutions to the problem of increasing NPAs.
In this regard, the IBC framework offers the best bet. This, together with the amended Banking Regulation Act (this gives the RBI the necessary powers to force the banks to act), provides a foundational basis for successful resolution of NPAs.
As per the RBI’s circular dated February 12, 2018, for accounts with aggregate exposure greater that Rs 2,000 crore, as soon as there was a default in the account with any lender, all lenders — singly or jointly — shall initiate steps to cure the default by preparing a resolution plan. The resolution plan approved by all lenders had to be readied within six months from the default date. If the deadline was missed, proceedings under the IBC would be initiated by referring the case to the NCLT which would get six months to complete the resolution process.
The banks got six months to come up with a resolution plan; if they didn’t, the NCLT would have to do it within six months. Therefore, at the outer limit, it was one year to get the resolution kicking (wherever delays happened, those were due to the cases being taken to courts — either by the promoter or competing suitor).
The best part was that the tribunal was to facilitate selling of the defaulter’s firm as a “going concern” to fetch maximum realisation. The results are there for all to see. Under this arrangement, the lenders were able to recover about Rs 3,00,000 crore which resulted in lowering of the GNPA ratio from a high of 11.2 per cent as on March 31, 2018 to 8.5 per cent as of March 31, 2020.
However, as per the directions of the Supreme Court, the RBI came out with a revised circular dated June 7, 2019, which gives lenders 30 days to enter into an inter-lender agreement to decide on a resolution plan. After this, they get 180 days to come up with plan; if they don’t, they are only required to make an additional provision of 20 per cent.
If they don’t finalise it within 365 days, they have to make an additional 15 per cent provision. In short, unlike the February 12, 2018 guidelines, banks are not obliged to refer the case to the NCLT in a time-bound manner. This has literally rendered resolution under the IBC process dysfunctional.
There is an urgent need to revitalise the process and make it robust instead of looking for short-term solutions.
The writer is a New Delhi-based policy analyst. The views expressed are personal.
https://www.dailypioneer.com/2021/columnists/stop-the-back-door–bailout-of-banks.html
https://www.dailypioneer.com/uploads/2021/epaper/march/delhi-english-edition-2021-03-10.pdf