The resolution of the NPA issue is critical for the future of the banking system and hence any measure to resuscitate the same is always welcomed with enthusiasm. The volume of around Rs 7 lakh crore as of December is quite overwhelming. The recent Cabinet approval of the NPA package has hence been seen as a possible solution to this problem just as were the previous attempts involving various structures and schemes.
Is the proposed scheme new? The details are not yet out and right now it is a matter of conjecture as to what the content would be. It appears that the Oversight Committee (OC) of the RBI will have a decisive say in the resolution of debt. Presently there is a S4A scheme which is an acronym for Scheme for Sustainable Structuring of Stressed Assets. Under S4A, banks can work out the best mode for resolving the NPA by bifurcating betwe en the sustainable and unsustainable part of the non-performing asset. The latter can be converted into equity or equity-linked instruments provided at least half of the debt is sustainable which is serviced with present cash flows. The OC is to supervise these transactions to ensure that they are transparent and that all stakeholders are protected.
Prima facie, the ordinance which is to be passed to change the Banking Regulation Act will provide strength and legitimacy to the OC and hence the RBI becomes a powerful player here. For the bankers, this is a good solution because the fear of taking a decision on NPAs is being passed on to the RBI. Currently bankers do fear that if they do go in for a high hair-cut there can be all the vigilance departments of the government haunting the m at a later date which can lead to considerable discomfort. By having the central bank as a party to such transactions, this psychological fear can be cast aside.
Therefore, this proposed regulation makes the RBI an integral part of the debt resolution process. The critical issues will be the following. First, which are the assets that should be targeted first? Here the choice is between larger and smaller loans followed by the sectors to be prioritized. Often the sector is responsible for bad loans creation and hence a call has to be taken on whether it is the appropriate time to cherry pick NPAs in specified sectors. Ideally a push should be given to the infra companies as they dominate the NPA basket.
Second, what would be the basis for selecting the asset once the size and sector are decided? There has to be a basis for deciding on the hierarchy of choice which can be done by getting credit rating agencies to provide a special rating to these assets based on criteria which the OC can decide. Once this is done, the OC can oversee the transaction of bifurcation of the asset into the sustainable and unsustainable parts which can then be sorted out.
The significant part of this mechanism is that so far all attempts have worked on the basis of getting lenders (banks) together to resolve the issue. This has been a challenge because the view of every bank tended to be different with varying compulsions that made decision taking difficult due to absence of coincidence of views. The ARC (asset reconstruction companies) scheme also has not been successful as banks never wanted to sell the bad asset at a low price to the ARC, and wanted the highest possible value, which led to a major difference of opinion.
To top it all witch hunting has always been a concern among bankers. It has been argued that getting in an independent overseer would make things easier as there would be less controversy. However, even today there could still be concern for the members of the OC who deliver decisions as there can be grey areas. But most certainly the incidence of doubt would be lower if the bankers were not taking a call on these structures.
Can there be a moral hazard? This cannot be ruled out because the moment banks are able to resolve the issue of NPAs they could get aggressive on lending with few quality checks knowing very well that the OC would be there to help out. Hence, the present scheme should be time bound and address the existing stock of NPAs and not be an open-ended scheme which can lead to temptation. Therefore, it would also be necessary for the RBI to also put certain conditions on banks which are able to restructure these assets in terms of future lending as well as governance to ensure that the probability of a repetition of such scenario diminishes in future.
It does appear that we are moving in the right direction and that this package when approved and implemented would help clean up the system to an extent. What would be of essence is the time taken to get the processes in motion so that resolution is quicker. A periodic review is essential on a quarterly basis to test the overall efficacy of this measure.
(The writer is Chief Economist, CARE Ratings. Views are personal)
Updated Date: May 04, 2017 13:28 PM