NPA crisis: Bad bank would work at cross purposes with the nascent but arguably more effective IBC

Chief Economic Advisor (CEA) Arvind Subramanian quotes from Sherlock Holmes with evident approval to explain what bad bank is and why it is the need of the hour: “Once you have eliminated the impossible, whatever remains, no matter how difficult, must be the solution.” The idea of bad bank gained greater currency when the Economic Survey 2017 suggested creation of a ‘Public Asset Rehabilitation Agency’ (PARA) to help fight the burgeoning problem of NPA in PSB.  The 21 state-owned bank, which account for two-thirds of banking assets in the country, hold close to 90 percent of bad loans. Gross NPAs of banks increased to around Rs 10.3 lakh crore, or nearly 11.2 percent of advances, as on 31 March, 2018, compared with Rs 8 lakh crore, or around 9.5 percent of advances, as on 31 March, 2017. Ergo, the CEA deduces the problem of NPA can be tackled only with the help of a state owned bad bank. It is difficult to agree with the Subramanian.  How can creation of an official asset reconstruction company make a dent into the problem of NPA especially when we have Insolvency and Bankruptcy Code 2015 already seized of the problem.  Furthermore, Assets Reconstruction Companies are not new to India with there being 19 of them in 2017 in business. Their success rate  of just 30 percent in recoveries, which is no better than what the National Company Law Tribunal (NCLT) had to show in its first major NPA resolution case involving Bhushan Steel taken over by Tata Steels entailing PSBs haircut (euphemism for write off of the outstandings) of about 25 percent or so, far from making a case for stepping up the effort through this channel, at best puts them at par with the IBC process as things stand. Assuming that a bad bank indeed becomes the second lynchpin as it were of the government’s effort in stemming the problem of NPA in addition to IBC, the consequences can be chaotic.  In fact, they may well be working at cross purposes rather than supplementing and complementing each other.  The NCLT under IBC avowedly fast-tracks the recovery process whereas a bad bank given the experience with ARCs work at a leisurely pace, scouting around for potential buyers.  Since they pay the harried banks only on, and to the extent of, recovery of the NPA, they do not push themselves too hard. [caption id=“attachment_1778613” align=“alignleft” width=“380”] Representational image. Reuters[/caption] Forum shopping could be fallout. Hectic lobbying could be done by promoters of companies responsible for NPA to ward off reference to NCLT under the IBC for the fear of being ousted from power and control of the companies whose ruination they have presided over wittingly or unwittingly. They could contrive and manipulate to have their company’s NPA resolution process referred to the alternative forum i.e. the bad bank. Indeed the bad bank could come to be the unenviable repository of bad loans of the banking system of the country. One should not jump from fire to frying pan which transfer of individual bank’s NPA to the bad bank would practically amount to. PSB consolidation is desirable but not their NPAs! If at all it is the claim of the bad bank enthusiasts that ARCs have the expertise and wherewithal to pursue bad debts more vigorously vis-à-vis the insolvency professionals under IBC, then the bad bank’s role should be limited to representing the banking system before the NCLT.  The expected overall haircut of 70 percent or so (Bhushan Steel haircut of 25 percent or so was an exception) does not augur well for the banking system.  The proposed bad bank can therefore be tasked with the role of scouting for best suitors and getting the maximum out of them.  Its data base and expertise should be intuitively better than insolvency professionals’. The government should junk the bad idea of bad bank.  It should stick to IBC process but improve the recovery rate by providing for continuous competitive bidding from anyone interested instead of sitting in judgment over the moral qualifications of the bidders in the race. (The author is a senior columnist and tweets @smurlidharan)