The powers given to the Reserve Bank of India (RBI) via the amendments to the Banking Regulation Act, 1949, to help it deal more effectively with stressed assets, may not appear as overarching as some might have expected. However, there is no doubt that empowering the regulator to direct banks to initiate insolvency proceedings in ‘specific’cases, is going to be of immense help. There are those who might argue the regulator should not be telling banks which companies should be wound down. However, the fact is the non-performing asset (NPA) problem is weighing heavily on the banking system and on the economy—the sooner it is tackled, the better. Indeed, one reason resolutions at Joint Lenders Forum (JLF) have been elusive is that that decisions need to be ratified by 75% of the lenders, by value, and 60% by number. These thresholds should no longer come in the way since RBI can now overrule those banks that may not be willing to go along with the others.
Also, the presence of a host of committees or oversight committees to ‘advise’ lenders on the resolution and ensure the decision-making has been done transparently will be of enormous help. So far, oversight committees have been made available for just one method of resolution—the S4 scheme—but with many more available, other methods of resolution can be attempted. Again, bankers will be compelled to cooperate. This supervision—and, in a sense, ratifying—by the committees should raise the comfort level for banks and make them a little more confident that they will not be hauled up by the CVC, CAG or CBI, for any hard decisions they may have taken, involving hits to the profits. This is important because the manner in which investigative agencies have dealt with senior bankers in the past—the former IDBI Bank chairman, for instance—has made them fearful of taking tough decisions. However, the presence of committees may not be enough. Which is why finance minister Arun Jaitley’s observations at the press conference on Friday, that amendments to the Prevention of Corruption Act (PCA) were in the offing, are very important. Hopefully, the changes to the law will be adequate to reassure bankers.
At the end of the day, the resolution process should happen with bankers concurring on the solution even if it is RBI or a committee that may be guiding them towards it. It is they who must decide which of the methods works best for them—winding up the company, a sale of the assets or an SDR. Also, it is important to get the process going, and even if half a dozen stressed exposures are tackled—including some of the large ones—the effort will acquire a momentum of its own. In this context, the finance minister’s observations that some more measures were being considered to help banks tackle the NPA problem are pertinent. The government is clearly serious about getting banks back on track and any accompanying steps would come in handy. Jaitley also spoke of some of the metrics that would be taken into account for infusing capital. While parameters such as closing down non-profitable branches and trimming overheads are important, it is hard to see banks being able to do this at a time when the unions remain powerful. Perhaps, this is the government’s way of encouraging consolidation.