Bad loans: Narendra Modi government set to target top willful defaulters first

By: | Published: March 31, 2017 6:36 AM

Finmin & RBI step up efforts as March deadline for completing asset quality review by banks looms.

The government this month asked MK Jain, chief of Indian Bank, to take charge at loss-making IDBI Bank, while Kishor Kharat of IDBI Bank has been directed to join Indian Bank.

The government could launch a crackdown on 5-10 big firms that are perceived to be among the top wilful defaulters of the 50-odd companies that account for a bulk of banks’ non-performing assets (NPAs), with the finance ministry and the Reserve Bank Of India (RBI) stepping up efforts to tackle the issue of massive bad loans as the March deadline for completing asset quality review by banks looms.

Banking sources said although a detailed, final course of action is still in the works, there is a thinking that promoters of some of the big defaulters– whose criminal intent of avoiding payments, prima facie, is established—should feel the heat. The specific action will, however, be decided in consultations with the Prime Minister’s Office. One possibility is to force such promoters to make a firm commitment on repayments, with specific deadlines, to avoid “more painful”, coercive actions, one of the sources said.

“The government is convinced that not one action is enough to address such a crisis. It requires several well-though-out measures on multiple fronts almost simultaneously to tackle the issue,” said a senior government official. More swapping or transfer of chief executives of PSBs can’t be ruled out at a later stage if some of them are found lacking discipline in tackling the crisis, although it’s not strictly on the table now, he added. The government this month asked MK Jain, chief of Indian Bank, to take charge at loss-making IDBI Bank, while Kishor Kharat of IDBI Bank has been directed to join Indian Bank.

The sources said the government and the RBI are discussing two broad set of actions to tackle the crisis. One is to keep the heat on wilful defaulters to send a strong signal to others, while taking steps to boost growth in most stressed sectors, such as steel and textiles, to help companies improve their cash flow. Also, conditions are being tightened for public-sector banks grappling with huge bad loans, linking government funds for their recapitalisation under the Indradhanush Plan to strict quarterly goals — such as staff cost rationalisation and improved operational efficiency.

Another set of actions centres round the possibility of setting up a bad bank or any other mechanism whereby the haircut to banks is minimised to the extent possible. This is a more difficult task for which the approval of the PMO is critical, as it requires a strong political backing.

The good part is, after the BJP’s victory in Uttar Pradesh, the Centre is better placed to launch bold reforms. However, the Opposition could still make any debt relief to private companies a huge issue, citing the Centre’s reluctance to waive crop loans to farmers in states such as UP, Maharashtra and Punjab. Any scope for a one-time settlement with large companies in those stressed sectors is also being discussed. The finance ministry, in active consultations with the RBI, is zeroing in on the best possible options.

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Already, the department of financial services this month sent a letter to some public-sector banks, setting conditions for recapitalisation, including effective NPA management, sale of non-core assets, further closing of loss-making branches and temporary trimming of employee benefits, if required. As far as setting up a mechanism to address the NPA issue is concerned, some of the options discussed are already articulated by chief economic advisor Arvind Subramanian or RBI deputy governor Viral Acharya.

Subramanian has 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. However, RBI’s Acharya has favoured setting up two agencies: A private asset management company that would seek to resolve assets with economic value in the short run; and a national asset management company that would rope in asset managers to turn around the assets that appear to be unviable in the short or medium term.

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