RBI Deputy Governor Viral Acharya today conceded that the Central bank’s “forbearance schemes” were partly to blame for the bad loan mess, and suggested a counter-cyclical approach to avoid its repeat in future. Stating that banks should not be given more than three months to rectify a dud asset, he said if a resolution does not work out, the lenders should initiate bankruptcy proceedings right away.
“Unfortunately the RBI, for variety of reasons, has engaged in various forbearance schemes saying you can take another 18 months or two years…In one way or the other, we’ve actually contributed to the NPA problem to become so protracted over a period. “What I’d like to see us to do is to be more proactive, be counter-cyclical in asking banks to make provisions,” Acharya said at an event to launch a book edited by one of his predecessors, Rakseh Mohan, late this evening.
Stressing the need to force banks to make timely provisions, Acharya said, “You have to do provisions in good times, you have to save for the rainy days rather than start looking for provisions when things have already gone bust.” Stating that banks are incapable of internalising the impact of bad assets on the economy, Acharya said it’s the RBI’s responsibility to make them do so.
When bank credit dries up, there’s a dip in capital expenditure, risk to employment, and livelihood consequences that go beyond bank balance-sheets. On the recurring debt restructuring schemes that the RBI has been offering to banks — CDR, SDR and S4A and 5/25 schemes as well as the present IBC to name a few — Acharya said, “RBI should not be in the business of creating restructuring schemes for banks to resolve a company.”
The first change he wants RBI to ensure is to make banks more proactive in provisioning, because the problem is “we don’t talk about adequate reserves being kept aside to bear a loss until a loan actually defaults,” he said. “I don’t think we should give a bank more than three months to rectify an account.” Welcoming Sebi’s recent directive to companies to report any sort of default to exchanges and rating agencies within 24 hours, he sought drastic action including initiating insolvency cases and zero tolerance for more relaxations.
“I think we should give banks three months to rectify the account. If you can’t rectify the account, it is an NPA, you’ve to file this case in bankruptcy. Period. Chapter closed. RBI should not be in the business of creating restructuring schemes for banks to resolve this company.” Ruing the very low recovery value in the current scheme of things, Acharya said, “Our loan recoveries are in the order of 15-25 paise to a rupee. In other parts of the world, where bankruptcy system is working well, and these things are being done in a timely manner, the recovery is to the order of 85-90 cents to a dollar.
“Banks elsewhere are actually over-collateralizing bad loans before a default is actually going to take place. Because the regulator is tough on banks when defaults take place, bank doesn’t want a default to take place,” he said, adding this makes the borrower also fear a default. “Since a bankruptcy is going to be filed right after a default, the promoter/entrepreneur/borrower doesn’t want default to take place. Hence, everyone is actually trying to avoid defaults and provide for all this in good times rather than saying ‘OK a default has taken place, now let’s figure out how we are going to deal with this problem’.
“And this is the number one thing I’d like us to change at RBI. I think if done so we won’t then have lending booms and busts at least at the frequency that we are having currently,” he said. “I want RBI to be Rahul Dravid rather than Virender Sehwag. Rahul is about holding the fort, keeping the ship in good shape, while Sehwag is about first-ball-six, Acharya said.
“As a central bank, our focus should be on what is the possible stress scenario that we could end up in and whether we are adequately provisioned for that as a central bank and have we brought the banks to provision for that,” the Deputy Governor concluded.