Why RBI prosposals on stressed assets may not work

The Reserve Bank of India has come out with two novel changes to address the festering problem of bad debts plaguing the public sector banks .

The first is to broaden the list of knights-in-the-shining-armour from the hitherto asset reconstruction companies (ARCs) and securitization companies to other banks and non-banking finance companies as well when it comes to buying of stressed assets is concerned. The RBI is jumping from fire to frying pan, so to speak. Most of the public sector banks have been singed by the scourge of bad debts, and private sector banks like Kotak Mahindra Bank are mighty cautious in extending industrial loans in the first place. One therefore wonders if they would enter this extreme area of risk-taking given the fact that the few ARCs (the supposed specialists in loan recovery) we have in the country, have nothing to write home about but instead have had a rather chequered history.



Fools rush where angels fear to tread. While a bank itself may not embark on this potentially suicidal course bordering on brinkmanship, it is the political pressure one fears the most. If LIC can be arm-twisted to bail out the public issues of other public sector companies in the course of government disinvestment, there could be a genuine apprehension that pressure will be brought about on say Bank of Baroda to buy the stressed assets of say Punjab National Bank. The move therefore is fraught with dangerous potentials and consequences.

The second is to ask banks to adopt the Swiss challenge method (SCM), generally used in the infrastructure projects but strangely preferred by the RBI in the matter of stressed assets buyout. Unsolicited offer is at the core of SCM. Any bank or ARC can offer to buyout a stressed asset of a bank on given terms whereupon the bank nursing the stressed asset has to announce publicly about the unsolicited offer and the terms thereof with a view to affording an opportunity for other banks/ARCs/NBFCs to offer terms better than the one offered by the gatecrasher if one may say so. If no one is able to come up with better terms, then the originator (gatecrasher?) bags the contract i.e. the right to buy out the stressed assets. Now what is good for infrastructure projects needs not necessarily be good for a bank’s stressed assets portfolio because the two are different from each other like cheese from chalk.

SCM for infrastructure is good because anyone who feels a subway must be built at a particular point may make a pitch for it with a concrete offer that is going to benefit the public without hurting anybody but a bank nursing a stressed asset will be hurt if it were to be compelled to sell out to the gatecrasher or to the one outsmarting him. For, it is for the bank nursing such asset to take a call on what it should do to salvage the best possible out of it. While the RBI can mandate provisioning and the extent of it for various sectors, it cannot mandate anything that even remotely could be considered coercive.

The RBI perhaps would have done well instead to facilitate a negotiated swap of stressed assets. To wit, if bank A has expertise in the steel industry and has demonstrated success in salvaging the highest from the defaulting steel borrowers then it should be allowed to takeover the stressed loan of bank B if this also happens to be a steel loan. This can be a win-win provided bank B is an expert in salvaging the maximum from cement stressed loans and bank A find itself out of its depths in this industry. In other words, a mutually agreed swap is any day better than an intrusive challenge.