No quick-fix solutions for accumulated NPAs
Those expecting immediate relief from the government’s latest scheme for cleaning up accumulated non-performing assets (NPAs) might have to wait some more. Going by some statements and interviews to media, it may have seemed that a quick-fix was at hand. Nothing could be further from the truth: what has accrued over so many years is unlikely to vanish with the mere snapping of fingers.
The government’s latest weapon against NPAs is an amendment to the Banking Regulation Act, 1949, which is expected to invest banks with some freedom in resolving bad loans without inviting the prosecutorial gaze of central investigative agencies.
NPAs have become a stumbling block in all attempts to re-ignite the economy. Bank credit growth has slowed, affecting capacity creation and expansion—bank credit grew only 5.1% during year to March 2017, against 10.3% in the previous year. The Reserve Bank of India’s (RBI’s) latest Financial Stability Report shows stressed assets (sum of gross NPAs and restructured assets) at 12.3% of assets by September-end 2016. After factoring in demonetisation’s adverse impact and the prolonged economic stasis, this ratio would have further deteriorated by March 2017. This has forced banks to turn risk-averse.
The amendment to the Banking Regulation Act is therefore expected to provide some relief. Unfortunately, the measure has failed to generate unstinted optimism as expected. The reason is that some bugs exist that could slow down progress in the short run.
At one level, the entire exercise is designed as a signalling system, indicating the government’s and the central bank’s resolve to straighten out what seemed like an intractable problem. It also signals that both parties are prepared to support banks’ attempts to resolve this crisis.
But the government itself nullified this confidence-building exercise with another adverse signal—two senior bankers heading two large public sector banks (PSBs) were transferred to smaller entities, signalling a demotion. This was done overnight, without informing either the individual bank boards or the autonomous Banks Board Bureau. Trust plays a large role in any signalling exercise and the latest order just chipped away at the first step to building trust with bankers.
The second crimp is PSBs’ lack of balance-sheet muscle to tackle the volume of NPAs. The International Monetary Fund’s (IMF) 2017 Article IV report on India shows that while aggressive NPA recognition by PSBs turned their return on assets negative in 2015-16, aggregate provisioning coverage ratio still remained low, indicating weak capital bases. The IMF report also shows that PSBs are content writing off loans rather than recovering them—a commentary on the numerous, though deficient, stressed asset resolution mechanisms. The short point is this: banks are unlikely to get aggressive with NPA resolution unless there is capital within sight.
The government, on its part, has drawn up a three-pronged plan to meet its capital infusion responsibility: limited capital infusion depending on performance criteria, merging some of the larger banks, and asking banks to source balance capital from capital markets. All these measures are time-consuming and the pace of capital flow is likely to determine the speed of resolution.
The third problem lies in the wording of the amendment. The government has inserted Section 35AA in the Act, which states: “The Central Government may by order authorise the Reserve Bank to issue directions to any banking company or companies to initiate insolvency resolution in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.” This is followed by a paragraph stating, “Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to the banking companies for resolution of stressed assets.” The RBI will also create committees of experts to advise banks.
Two issues spring to mind immediately.
First, the amendment does not explicitly insulate bankers from future persecution, nor is there any implicit signal. The Prevention of Corruption (Amendment) Bill, 2013, which includes provisions for such a shield, is stuck in Rajya Sabha. Therefore, till there is clarity on where the buck stops—the Centre, the RBI, the committee of experts appointed by RBI or the bankers—progress is likely to be slow.
Second, the amendment is unclear about how the Centre proposes to take the resolution forward: will the government monitor each individual asset resolution or provide an umbrella order enabling the RBI to calibrate its action depending on the merits of each case?
Both possibilities have consequences. In the first instance, there are risks of government being accused of cronyism. In the second, the central bank (or its appointed committee) will be exposed to scrutiny from investigative agencies, which may be detrimental for any central bank.
Finally, if all the above do fall into place, there is still one snag: capacity constraint at the National Company Law Tribunals. Of the 700 cases filed with the tribunals, only 70 have been admitted. Moreover, the National Company Law Appellate Tribunal has ruled (as reported by this newspaper) that the 14-day deadline for admitting or rejecting a proposal is not binding, though once admitted, the case has to be resolved in the mandatory 270-day period.
Make no mistake: there is definite movement towards resolution. But, as mentioned earlier, do not expect miracles.
Rajrishi Singhal is a consultant and former editor of a leading business newspaper. His Twitter handle is @rajrishisinghal.
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