1. Column| Rational Expectations: Need an NPA settlement panel

Column| Rational Expectations: Need an NPA settlement panel

Without this, bankers will continue to worry about the CAG or the CBI pulling them up later

By: | Published: May 18, 2016 7:11 AM

Now that former CAG Vinod Rai has been at the helm of the Banks Board Bureau for over a month, he will have realised that the biggest problem facing banks is not just the rising level of NPAs, but in reaching a settlement on them, especially since the DRT process is a complete failure (see graphic). A R4,000-crore offer from a Vijay Mallya to settle his outstanding loans of around R9,000 crore is easy to turn away from, but should banks do the same with a firm, cash-on-the-table R6,000 crore considering it could take decades before they are able to access and then sell his assets?

The answer is easy, banks should take the R6,000 crore—were it to be made with the cash deposited up-front with the Supreme Court—but more important is what happens after that. Will Vinod Rai’s successor at the CAG pull them up and have an audit para on how R3,000 crore was lost and, even if he doesn’t, will the CBI knock on Arundhati Bhattacharya’s door years after she has retired?

This is a question even someone with the vast administrative experience of a Vinod Rai will not find easy to give an unequivocal answer to. As the CAG, Rai was asked how PSUs were to tackle the L-1-itis that plagues PSUs—they have to award a tender to the lowest bidder—and is responsible for their poor functioning. While a Bharti Airtel has no problem negotiating any contract, a BSNL has in the past seen tender after tender being scuttled with one or the other party going to court crying favouritism when it didn’t win the bid. Rai’s answer used to be that, were the PSU (presumably its Board) to record the reason why a contract was being given to a certain firm without a tender process, he would accept it.

While that’s a good way to go about things and ensures that PSUs have the same flexibility that their private sector counterparts do, it is not clear Rai’s successors are willing to adopt this approach—and even if they do, there is nothing that prevents a CVC or a CBI from deciding to go after the individual who signed off on the contract.

In the GSPC case that has been hitting the headlines with the Congress party and Jairam Ramesh going to town with it while citing a CAG report on it, one of the allegations made against the Gujarat PSU—and through it, at Narendra Modi, who was the chief minister of Gujarat at that time—was that it awarded a contract to a consortium headed by a firm called Tuff Drilling which didn’t have the expertise to fulfill the contract. Jairam is right since, as it happens, it did not fulfill the contract—though GSPC later forfeited its bank guarantee for this, it had to award the contract since the Tuff-consortium which had the requisite experience was the L-1 bidder. This, of course, is a damned-if-you-do-and-damned-if-you-don’t case since, had the tender not been awarded to the L-1 bidder, the CAG would have mentioned it—and when it was, the CAG also mentioned it!

It is, of course, true that many public sector organisations have done exceedingly well despite this—ISRO, DRDO, NSE, NSDL, UIDAI and NPCI are great examples—but every PSU chief cannot be expected to have the same sagacity as the men who headed these organisations. It is, for instance, possible to design the technical specifications in such a way that only one or two top-class firms qualify, but this can also be construed to be rigging the tender by the courts, the CBI or the CAG.

This is where Article 12 of the Constitution comes in, along with the way the courts have interpreted PSUs and other such bodies as ‘instrumentality’ of state—this means that, like the state, they have to give equal opportunity to all; this is how the reservations apply to PSUs, this is how L-1 becomes a gold-standard, and so on. In an ideal situation, the government needs to try and convince the courts to exempt commercial bodies like PSUs or banks from this, but getting a favourable verdict is unlikely—courts want to even bring in PPPs into the ambit of instrumentality of state—and, in any case, can take decades. Getting Parliament to amend the Constitution is another possibility, but one so remote that it isn’t even worth keeping in mind.

This is why bankers are asking for a firm cover while negotiating deals with the likes of a Mallya since, in such cases, there is absolutely no scope to float a tender. Indeed, in even the case of GSPC which is discussing a stake sale with ONGC, doing a similar deal with a foreign major like a BP was ruled out since nobody wanted to sign on what would have to be a negotiated deal.

While the government needs to apply its mind to this larger issue, a quicker solution for negotiating settlements for bad bank loans would be to borrow from existing settlement forums. Tax notices, for instance, can be settled by an order from the Settlement Commission—though the process is so laborious that few use it, there has never been a CBI/CVC/CAG objection to the Settlement Commission. In which case, one option is to create an NPA Settlement Commission—through Parliament, not an executive order—and let it negotiate with the Mallyas of the world or even with the proposed National Investment and Infrastructure Fund which might be in the market to buy some bad loans. Bankers like Bhattacharya then no longer have to be worried about the proverbial knock on the door.

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