What Do PSBs Want? :: Just Keep the Bad Borrowers at Bay!
What Do PSBs Want?*
No ‘Bad Bank’ Please! Just Keep Bad Borrowers at Bay!
M G Warrier
We have, on different occasions covered the “Bad Bank” story in some detail in different contexts. On July 2, 2018, the Hindu Business Line published a full-page feature captioned “‘Can ARCs ease banks’ burden?”. Bureaucracy has its own ways of getting things done in its way and this is the latest example of such efforts. The report is indicative of how vested interests keep certain ideas floating until they could be pushed through. To recap:
The idea of ‘Bad Bank’ was mooted in Economic Survey 2016-17, then called ‘Public Assets Rehabilitation Agency’ (PARA). All the reasons for not going ahead with institutionalizing bad assets remain valid today except that the idea now gets support from badly managed banks facing the threat of merger which expect to get another lease of life by transferring a portion of stressed assets to the new entity.
In India, fortunately, big public sector banks which have the major portion of NPAs are big enough to professionally manage their own affairs, if functional parity in management and conduct of business is allowed which their counterparts in the private sector enjoy.
The reality that the concept of an independent institutional arrangement for handling stressed assets of the banking system has built-in features that will be harmful for the financial sector in the long run. The possibility of such a depository of impaired assets acting as a disincentive for professionalizing credit appraisal, credit delivery/monitoring and recovery systems, which process is on track now, seems to have been taken cognizance of, by the Sunil Mehta Panel which has dropped the idea of ‘Bad Bank’.
Outsourcing of responsibilities at certain layers of credit appraisal or super-imposing decisions using ownership rights through back door have already contributed to the present NPA situation in PSBs. Shifting the responsibility for recovery from the lender to another agency goes against the principles of best banking practices. Creating a separate ‘pocket’ for decaying assets can further weaken the supervisory and regulatory bodies in the financial sector for obvious reasons and the idea should be given a decent burial at this stage.
But, as the growing NPA menace continues to challenge the future of Indian Banking System, GOI and RBI together are making all efforts to contain the damage. One gets an impression that this time around, all stakeholders have woken up from the slumber induced by the reassurances from the owner of PSBs (GOI) that depositors’ interests are safe in banks. Having said that, utmost care is needed to ensure that the possible scare in the public mind emanating from the analyses of data on banks’ stressed assets (NPAs), magnified by the ‘flashes’ about scams, do not get blown up out of proportion. Such a situation can adversely affect the already impaired health of the Indian financial system.
Here, a couple of observations made by former RBI Governor Dr Y V Reddy in a recent speech in Kolhapur are relevant. I quote:
“…The Non-Performing Assets in 1996-97 were 17.8 percent of gross advances and 9.2 percent of Net Advances. These ratios are much higher than what is prevailing today at 11.7 percent and 6.9 percent in 2016-17. They were brought down to 9.4 percent and 4.5 percent in 2002-03, still higher than in 2015-16…. There were weak banks, and some public sector banks needed a capital injection. These issues were addressed quietly, gradually and systematically. As a result, the NPAs were down to 2.0 percent and 0.9 percent in 2008-09…”
“…Bank deposits continue to be as safe as they have ever been, as far as private sector banks are concerned. They have adequate capital.
The public sector banks do not have adequate capital to take care of the depositors' interest, but since the majority ownership is that of the government, the deposits are safe. These are not limited liability companies, but institutions established under the law. However, the depositors are protected with the tax-payers money. …”
As the health of PSBs remained neglected and these institutions were exploited for different purposes by different interest groups, the recent efforts by RBI to use modern diagnostic tools and ‘surgical treatment’ have brought several uncomfortable realities to the fore. These should be seen as positive signs leading to the infusion of professionalism in the conduct of banking business in India.
The introductory to the “Statement on Developmental and Regulatory Policies” released by Reserve Bank of India simultaneously with the Bimonthly Monetary Policy Statement issued on June 6, 2018 read as under:
“This Statement sets out various developmental and regulatory policy measures for strengthening regulation and supervision; broadening and deepening financial markets; improving currency and debt management; fostering innovation in payment and settlement system; and, facilitating data management.”
As the mainstream media did not take much cognizance of this document published by RBI at www.rbi.org.in (see Box for excerpts) let us try a brief recap as the content helps understand why RBI is doing what RBI is doing. The statement covered (a) Increase in Liquidity Coverage Ratio (LCR) carve-out from Statutory Liquidity Ratio (SLR), (b) Changes in procedure/modalities in valuation of State Government Securities and spreading of MTM losses (c) Policy change providing for Voluntary Transition of Urban Cooperative Banks into Small Finance Banks, (d) need to encourage formalization of the MSME Sector, (e) Convergence of Priority Sector Lending (PSL) guidelines for housing loans with Affordable Housing definition under Pradhan Mantri Awas Yojana and (f) Decision to permit Core Investment Companies to invest in Infrastructure Investment Trusts (InvITs) as Sponsors under Regulation and Supervision.
Excerpts from Statement on Developmental and Regulatory Policies*
*Source: RBI Website
Mehta Panel on NPAs
Last month, through a timely and thoughtful intervention in June 2018, GOI appointed a committee under PNB non-executive chairman Sunil Mehta with the SBI chairman and Bank of Baroda managing director PS Jayakumar as members to study and make recommendations for the resolution of the NPA issue. The Mehta Panel report was accepted by GOI during the first week of July 2018. In a media interaction Union Minister Piyush Goyal, announcing the acceptance of the recommendations explained the future course of action as under:
Independent asset management companies (AMCs) and steering committees will be set up for faster resolution of bad loans in the banking system. The proposal is to set up an asset management company/alternative investment fund (AIF)-led resolution approach to deal with NPA cases of more than Rs 5 billion. There are about 200 accounts, each of which owes more than Rs 5 billion to banks. Their total exposure is about Rs 3.1 trillion. AIF would raise funds from institutional investors. According to the minister, the AMC, to be set up under AIF framework, will become a market maker and thereby ensure healthy competition, fair price and cash recovery.
The committee has also suggested an asset trading platform for both performing and non-performing assets.
The panel has also suggested a plan for dealing with bad loans up to Rs 500 million. Under the SME Resolution Approach (SRA), loans up to Rs 500 million would be dealt using a template approach supported by a steering committee. The panel has recommended that the resolution should be non-discretionary and completed in a time bound manner within 90 days.
The Mehta committee has proposed a Bank Led Resolution Approach (BLRA) for loans between Rs 500 million and Rs 5 billion. This segment has an exposure of over Rs 3 trillion. Under the BLRA approach, financial institutions will enter into an inter-creditor agreement to authorize the lead bank to implement a resolution plan in 180 days. The lead bank would then prepare a resolution plan including empanelling turnaround specialists, and other industry experts for the operational turnaround of the asset. In case the lead bank is unable to complete the resolution process within 180 days, the asset would go to NCLT.
The gross non-performing assets (NPAs) of PSBs stood at Rs 7.77 trillion at end-December 2017. Total NPAs of all banks, including private ones, was a whopping Rs 8.99 trillion.
A word about resources mobilization
After releasing the Mehta Panel report on NPAs, Sunil Mehta mentioned in a media interaction that Rs800-900bn would be needed to resolve large toxic loans. The immediate media response to the Mehta Panel report on NPAs resolution is comforting.
Last three years have been stressful for banks, government and the banking regulator. Not only because the efforts to cleanse the financial system from various chronic ills resulted in several weaknesses of the system surfacing or the rising demands on budgetary allocations to support ailing banks. The period also brought to light deficiencies and vulnerabilities in management of institutions across public and private sectors. During this period the institutional system in the Indian Financial Sector has proved its resilience to withstand pressure and has retained public trust.
Banking being solely dependent on monetary resources, emphasis on ensuring capital adequacy, a reasonable growth in deposits base and flow of credit is natural. Sunil Mehta has arrived at a tentative figure of Rs800-900bn to resolve large toxic loans. There will be other demands, besides the likelihood of this figure too rising higher.
Extraordinary situations call for extraordinary solutions. Taking a clue from Mehta’s observation that “…the returns on stressed assets are quite different from biotechnology, IT and private equity funds,” GOI should consider tapping ‘idle domestic assets’ for long-term investment in the banking sector.
Several individuals and organizations may be holding assets in cash, gold and real estate, a part of which, if allowed to be mainstreamed and invested may partly cover the huge funding need at this juncture. Of course, creating national consensus and building public trust will be an uphill task.
*Submitted version of the article published in the August 2018 issue of The Global ANALYST