Resolving the NPA problem is analogous to a truck loaded with explosives, being driven by a group of bankers where there is no consensus on how the toxic material can be offloaded as there is a fear of the same blowing up on their faces. Each navigator has her/his own view and the suggestions made are not mutually acceptable. The result is that the quantum of these explosives has multiplied over time and the constant suggestions/options provided by the policeman from outside have not quite been followed as the group still cannot agree on the best route to the dumping ground.
The present ordinance on NPA resolution is quite different from the earlier endeavours as, finally, there is an entity which has been empowered to take such a decision, which makes it easier for the navigators of the truck to do as they are told. As it is a top-down approach, where there are legal structures, the navigators have no choice. Also, the final authority, i.e., the policeman has the final word, and his rules have to be obeyed. This, in essence, is the major takeaway from the new ordinance on NPA resolution that was met with considerable cheer, as prima facie there are no holes in the fabric.
The onus is now on RBI to take this decision, and the banks would really have nothing to do, but refer the NPA to the NCLT and the due process of the Insolvency and Bankruptcy Code would be followed. The decision is pragmatic as RBI is both independent as well as the regulator of the banks and has a rightful place in this drama. In fact, it has the legitimate right to be the director of the script. Besides, at the end of the day, the NPA concern falls in the domain of RBI as it has a destabilising effect on the banking system.
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Should the bankers heave a sigh of relief? To an extent, yes, because a major concern has been that they could get engulfed in a witch-hunting process if a decision taken today turns out to be unacceptable five years down the line. This fear is allayed with RBI taking the decision. Further, as normally a consortium of lending banks could have a differing view on the resolution process. Those against such a resolution due to commercial considerations could be at a disadvantage, but could seek solace as a troubled asset has been resolved, finally releasing capital for future business.
How about RBI? With RBI coming into the picture, the members of the so-called deciding or oversight committee will be critical. Will they be outside experts or RBI officials? This is important because taking such decisions will require some degree of expertise in the way banks work and loans are disbursed. While central banks are definitely aware of the macros, the experts deciding on such resolution need to be conversant with the micros. This is so because the bank will have to cherry-pick the bad assets that need to go to the ICU, and such decisions will require in-depth knowledge of the loan, company, and industry in which it operates. Often, such NPAs result due to commercial reasons and may turnaround when the economic cycle turns over. Hence, RBI committee has to be fully cognisant. A thought here could be to get in experts with central banking experience, who have also worked in the commercial banking as they would be best-placed to take a decision.
The efficacy of this move can only be seen over time. The reasons are manifold. First, the quantum of NPAs that we are looking at—around 12% of outstanding advances—is really large. Are we looking at lowering this ratio of 10% or 5% or 2%? This medium-term goal has to be defined with definite timelines.
Second, the time consumed in making such decisions is critical because if it is done in a piecemeal fashion, the measure may not be too effective as one can never be sure of how the banking system evolves over time. Clearly, timelines need to be fixed as the IPC processes could take up to nine months to move forward.
Third, the back-end infrastructure is necessary to be in place and this means two things. One, RBI should have enough manpower to handle this issue and the right persons need to be chosen, either from within the organisation or outside. The precise numbers would be known once the loans are identified in an order of priority—this can be through a rating process devised by ratings agencies. Two, the legal system should be well equipped to take on this challenge. If we are targeting only the top 50 defaulters then the job may be easier. But it is necessary to have this pecking order in place.
However, an issue that will continue to be discussed in various forums would pertain to the future of such resolution. The ordinance talks of empowering RBI to resolve the issue do not cover the ground of how to prevent such assets from being created. When easy solutions exist, a moral hazard develops where banks become laxer with their credit standards. RBI, hence, will have to make it clear as to whether its approach is going to be an on-going one or time-bound. Simultaneously, RBI should consider some punitive action on banks for the creation of NPAs which, though difficult, has to be brought in to serve as a deterrent.
The government’s approach towards resolving the issue of NPAs has been remarkable and the various schemes brought out are part of the fine-tuning mechanism where lessons of the failure of existing schemes have been improvised. The present dispensation appears to have reached the so-called last mile and definitely looks superior to the other attempts. The execution would have to be planned meticulously to move towards a successful conclusion.