To resolve the vexed issue of stubborn levels of non-performing assets (NPAs) with banks, the government and Reserve Bank of India (RBI) may adopt a strategy wherein private asset reconstruction companies and an asset reconstruction company (ARC) in which the government is a major stakeholder will both have roles — the former to deal with assets that have ample chances of turnaround and the latter to address the more difficult ones. While this idea figured prominently as finance minister Arun Jaitley held a key meeting with RBI governor Urjit Patel and other top officials here on Friday, the performance of existing private-sector ARCs also came up for scrutiny, according to sources. A final decision was not taken, the sources said, adding that the government and central bank would have another meeting to dwell upon the matter soon.
The bad loan crisis has bled the balance sheet of banks, while severely affecting investments by the private sector. RBI deputy governor Viral Acharya had earlier proposed the setting up of a private asset management company and a national asset management company. Chief economic adviser Arvind Subramanian had floated a public-sector ARC to address what he calls the twin balance sheet problem afflicting banks and corporates. The idea is to segregate banks’ NPAs from the healthy ones and also bolster banks’ capital base simultaneously, so that they can play a signal role in boosting private investment.
The meeting was convened amid reports authorities are considering a harder crackdown on a list of wilful defaulters. The government has collated details on bad loans worth nearly Rs 50,000 crore that need immediate action against promoters and directors of chronic defaulters, CNBC reported, citing industry sources. FE could not independently verify this.
The top wilful defaulters’ list prepared by the government and banks includes a number of diamond traders, two now-grounded airlines, a central government commodity trading agency, an erstwhile state government-promoted communication undertaking, a regional industry association, a media house with operations across the country, a multi-state agricultural cooperative, mining companies, realty developers, garment brands, and several individual proprietors, the TV channel reported. This list was to come up for discussion on Friday’s meeting, chaired by Jaitley and attended by financial services secretary Anjuly Chib Duggal and the RBI’s Acharya, among others.
Last year, the Finance Standing Committee of Parliament had suggested forensic audit of all restructured loans that had turned into stressed assets. The RBI is also reportedly keen on creating a common pool of forensic audit firms to quickly act whenever a high-value fraud needs to be investigated.
In the Economic Survey of 2016-17, Subramanian suggested setting up a centralised Public-sector Asset Rehabilitation Agency (PARA) that would purchase stressed loans (especially the largest and most difficult ones) from banks and then work them out, either by converting debt to equity and selling the stakes in auctions or by granting debt reduction, depending on professional assessments. He had said PARA could be 49% government-owned (to give it the operational freedom it needs); there could be another 10-11% LIC-type of holding to give it the government character and the rest could be private.
However, the RBI’s Acharya favoured setting up of a private asset management company modelled as a private agency, which would seek to resolve assets with economic value in the short run. On the other hand, a national asset management company, he said, would rope in asset managers such as asset reconstruction companies and private equity to manage and turn around the assets that appear to be unviable in the short or medium term.
Widening the ambit of the Rs 40,000 crore National Investment and Infrastructure Fund so that it can take over the stressed assets are also among the options being talked about.
The Budget for 2017-18, however, has not made any fund provision for any of such initiatives, apart from allocating Rs 10,000 crore for recapitalisation of public-sector banks in 2017-18, as proposed under the Indradhanush plan, compared with Rs 25,000 crore for the current fiscal.
NPAs reached 9% of total advances by September 2016, double their level a year earlier. Importantly, more than four-fifths of the NPAs were in the public sector banks, where the NPA ratio had touched almost 12%. At its current level, India’s NPA ratio is higher than any other major emerging market, barring Russia. According to CARE Ratings, NPAs accounted for Rs 6,97,409 crore — or 9.3% of banks’ advances — as of December 2016.