In fight against PSB loan crisis, RBI’s Viral Acharya looks to field Sudarshan Chakra

By: | Published: September 8, 2017 3:11 AM

Reserve Bank of India deputy governor Viral Acharya on Thursday said the Indian banking sector needs a more powerful bank recapitalisation plan to restore the health of the public sector banks.

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Reserve Bank of India deputy governor Viral Acharya on Thursday said the Indian banking sector needs a more powerful bank recapitalisation plan to restore the health of the public sector banks. “The Indradhanush was a good plan, but to end the Indian story differently, we need soon a much more powerful plan – “Sudarshan Chakra,” Acharya said at a memorial lecture organised by the Indian Institute of Banking and Finance. Acharya said that given the correctly recognised scale of NPAs in the books of public sector banks and the lower internal capital augmentation given their tepid credit growth, substantial additional capital infusion is almost surely required. This is necessary even after tapping into other avenues, including the sale of non-core assets, raising of public equity, and divestments by the government, he added.

Acharya also said the enactment of the Insolvency and Banktruptcy Code has been a watershed, adding that the number of bankruptcy cases that have been filed by operational as well as financial creditors is encouraging. “Going forward, the Reserve Bank hopes that banks utilise the IBC extensively and file for insolvency proceedings on their own without waiting for regulatory directions,” Acharya said, adding that out-of-court restructuring may be the right medicine at ‘pre-default’ stage, as soon as the first signs of incipient stress are evident or when covenants in bank loans are tripped by the borrowers.

Once a default happens, the IBC allows for filing for insolvency proceedings, time-bound restructuring, and failing that, liquidation. This would provide the sanctity that the payment ‘due date’ deserves and improve credit discipline all around, from bank supply as well as borrower demand standpoints, as borrowers might lose control in IBC to competing bidders, he said.

Before the IBC and in the absence of an effective, time-bound statutory resolution framework, various schemes were introduced by the Reserve Bank to facilitate viable resolution of stressed assets. While the schemes were designed, and later modified, to address some of the specific issues flagged by various stakeholders in individual deals, the final outcomes have not been too satisfactory. The schemes were cherry-picked by banks to keep loan-loss provisions low rather than to resolve stressed assets, Acharya said.

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