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Home >Companies >People >‘It’s not weakness in IBC, but in how people are gaming it’: Nirmala Sitharaman
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NEW DELHI : Days after announcing the mechanics of the bad bank, which will remove 2 trillion of bad debt from the books of banks, and weeks after announcing a framework that will make more people eligible for loans and scrapping the retrograde retrospective tax, finance minister Nirmala Sitharaman discussed the initiatives, and the state of the economy, in an extensive interview with Hindustan Times. Edited excerpts:

You announced on Thursday that the government will provide 30,600 crore in guarantees to the National Asset Reconstruction Co. Ltd to buy 2 trillion of bad loans from banks. This will be in a 15:85 split, with NARCL offering banks cash for 15% of the value of assets and issuing security receipts for the rest (partly guaranteed by the government), which the banks can sell in the market. Will there be an appetite for these securities?

Yes. That these assets have been sitting without resolution need not give us the impression that they have no value. The resolution formula will be given priority, not liquidation. When you look at the resolution, there is an implicit message being given that these are workable assets and that with some doing, they will be valuable. There will definitely be interest in the market.

I lay a lot of emphasis on the professionals (managing the assets), which is why, along with NARCL, we have set up India Debt Resolution Co. Ltd (IDRCL). It will have panels of experts; panels because the assets belong to various categories. These panels will deal with assets in domains in which they have expertise. With that kind of specialized application of mind on each asset, we think they will be made up in such a way, and valued in such a way, that the market will find it interesting. Bank officials do not have that kind of specialization.

IDRCL is key to this, right?

IDRCL is 49% owned by banks. Indian Banks Association (IBA) will have to drive the process as these assets belong to banks; IBA will have greater oversight on this. It is in their interest to have these run efficiently. There’s also a fee (against the guarantee) that NARCL will have to pay (to the government); the fee becomes higher with time; so the sooner you sell an asset, the better it is.

Are you confident this will work?

Yes, because this entire mechanism was driven by the banks; many of these big-ticket exposures are through consortia; unless all banks agree, no resolution is possible. Now because it will be through IBA, it’s for them to constantly keep moving towards better resolution, towards consensus.

So something we have all been talking about for ages—a bad bank—is finally here.

In a slightly different form, which will be a lot more transparent and owned by the banks themselves. In a country like the US, 99% of the banks are private. In India, you have the public sector holding a big share.

Is this a transient mechanism?

At this stage, we are not describing what happens after five years. 2 trillion will have to be cleared in five years. Beyond that, I envisage banks themselves will be professional enough to figure out how they are going to handle their non-performing assets. If at that time there is a need to continue with this for larger assets, they will continue.

The misuse of a section of the Insolvency and Bankruptcy Code (IBC), where creditors agree to take huge haircuts, sometimes over 90% on even good underlying assets, has resulted in demands for strengthening the law. Do you agree?

Yes and no. Where the haircuts are so significant, I think some banks have also been sitting up and saying we can’t accept it. In a recent case that resulted in a 98% haircut, I was glad that two banks voiced dissent, and they also probably went to the court and sought a stay. Such course corrections highlight that the weakness is not IBC itself, but in this way, the issues are being resolved. So I would look for a solution rather than tinkering with the act itself. Where amendments are required to strengthen the act, I am in favour of them. But in practice, if there are ways in which people are either gaming it or conveniently giving an inference that is in spirit, not in line with the law, I think other ways of legal redressal are required. It is not the weakness in the IBC but in how people are gaming it. So, we will have to see both—I am happy to strengthen IBC because it is one of the better ways of resolving; it focuses on the resolution of a going concern rather than liquidation.

India announced the launch of Account Aggregators (AAs allow individuals and enterprises to share credit and financial information relating to their accounts or transactions with one financial or service entity with others, with their explicit permission, so as to prove their creditworthiness) which could broaden the credit base even as it makes it easier for financial institutions to lend. How do you see the acceptance of these?

Small and medium enterprises and the middle class will benefit from this. We are all worried about data privacy, and while there is a data privacy law that will come, taking this avenue to provide comfort to borrowers has been received well. I think the fact that people have grasped the details of AA shows that people are willing to see how it helps optimise the system.

Are nudges required? AAs will become stronger only if more organizations dealing with people, such as telecom operators, become part of the network. Your thoughts?

Nudges are required for many things the government is doing—even small digital adaptations that people must do. A lot of small nudges have been happening in the past year, and that is evident in the way UPI (United Payments Interface) has been growing—we are extending it to overseas Indians now. The AA framework also needs a nudge. This is a great leap forward. But as you said, privacy law and a data protection framework are needed. Necessary consultations will have to happen. They can’t be bypassed. If the stakeholders are brought on board, [if] their inputs are used to strengthen the law, then there is greater acceptability when it is passed. I don’t think there will be a delay; the more the consultation, the better it is. That process will be done.

India has been ahead of the curve on many things—UPI, for instance, and AAs, but seems to be lagging behind on adopting cryptocurrencies...

It may not be the best example but take El Salvador. The way in which they went ahead to accept it (Bitcoin) as a currency. You’d think common people don’t care about digital currency, but the public took to the streets against the move. It’s not a question of literacy or understanding; it’s also a question of to what extent this is a transparent currency; is it going to be a currency available for everyone? El Salvador may be an exception, and they tried some experimentation. There are other countries that are talking about the central bank having a legitimate cryptocurrency. That could be a possibility.

A lot of consultation took place. The Reserve Bank of India’s views were also taken; now, we have to formulate this in the form of a Cabinet note on the balance we can strike. This is not an era where you can say I don’t care about what’s happening, or we don’t want to do anything. At the same time, are we yet ready to go the El Salvador way? We have to be sure that a futuristic thing can’t be shut out.

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