An interesting debate is ensuing on setting up of a bad bank in the country. Arguments are being advanced for and against this development, but we are yet to hear the views from either the IBA or any form of association of the bankers.
Just a few days back, Axis Bank, sold its entire exposure of Rs 1,000 crore to Edelweiss ARC at a discount of 45% becoming the fourth private sector lender to have done so. Other three lenders have sold Rs 2,200 crore. Contrast this with the approach of public sector banks (PSBs), which would prefer to restructure the loan and not take a hit on their balance sheet and write off R1,440 crore in one go, as has been done by private sector banks. Assuming they were to sell this amount on same terms, ARC’s will not offer more than what they had offered to other banks.
The ARC which bought this asset under SR (security receipt) after discount of 45% is supposed to redeem SRs within the next three or five years and banks holding these SR may or may not get full value on redemption. So, loss to the bank may turn out to be over and above the 45% discount allowed earlier.
It’s not unlikely that some complaint may be made to CBI /CVC in fifth year that an official of the bank conspired with ARC to cause huge losses to the Bank. ARC which buys the asset will take time to reconstruct or turn around the company and it may happen much after the redemption of the SR. ARC can intentionally delay reconstruction of the asset, so as to avoid payment/redemption of the SR and may resort to ingenious accounting technique to avoid payment. Nonetheless, the decision of the banker will be questioned by a police officer who may not know the facts as they existed five years back and view these objectively. Interrogation will be undertaken with the presumption that the banker was dishonest.
There is an ongoing case, where CBI is questioning and humiliating a chairman, now after four years of his retirement, for a loan sanctioned and disbursed, not by him, but by his regional manager, where the borrower had diverted money. That chairman is a well-known figure in the banking circle for being honest.
More important, data shows that sales to ARCs are not happening, as there is no meeting of mind between ARCs and the bank. Matter gets stuck on valuation and ARCs are asking for huge discounts as they are buying stressed asset with high element of risk. Bankers, on the other hand, are scared about the wrath of CBI /CVC and prefer not to sell.
Meanwhile, banks are saddled with stressed assets which are amount to R6.3 lakh crore. We need to draw examples from other countries and customise solutions for own. It’s worth while to consider the way Malaysia’s bad bank, Danaharta, resolved the morass of toxic assets and successes of the Resolution Trust Corporation in the United States without forgetting the frustrations of Indonesia in such an attempt.
The government and RBI have to be on the same page to help manage this by providing appropriate regulatory framework, accounting policies, taxation laws/benefit and financial support to kick-start this process.
Its imperative to understand the model Malaysia adopted to resolve this issue during 1997 when after 70 % growth in credit the bad assets reached nearly a quarter of bank’s loans.The country tackled this by having a three-pronged strategy, i.e., by having one agency to pump cash into the system, other to monitor restructuring to rework the corporate debt and the third agency Danaharta (bad bank) to buy bad assets.
A young professional, Mohamed Azman, was made responsible for the bad bank. The bank was willing to buy any toxic asset with value above 5 million ringgit and pay in addition 80% of the amount beyond this price if and when it earned. Those who refused to sell were made to write down the loan to a value determined by the bank.
For India to have a bad bank, we have Sarfaesi Act, 2002, CDR, SDR, S4A, DRT plus an Insolvency and Bankruptcy Act passed by the Parliament and the sooner it’s notified the better it is for resolution of the bad assets.
If public sector banks were to sell toxic assets to bad bank—owned and/or controlled by the government or with government having majority stake—at a price determined by the bank then apprehensions about price discovery and attendant consequences will be non-existent.
The bank can have management experts with domain knowledge to turn around a company , say in the steel sector, with a proviso that 80 to 90% of the amount earned beyond the initial price fixed by the bank, as and when earned will be passed on to those banks which sold the asset. Banks will also have a choice to buy back its share at some price which may be decided based on some well laid-out formula. The banks are not supposed to run these companies by converting debt to equity, but can ease out the errant promoter and his cronies from the board and the management.
If ARCs can have a model to buy and reconstruct an asset, then why can’t PSBs conjure up such a scheme. If not let bad bank do it for them, and also provide last mile liquidity. Domain experts of each sector, where a debt aggregation has happened, when combined with last mile liquidity can, in a centralised manner, turn around a company like Essar Steel. Promoters who divert money would have to be made accountable and wilful default be made a crime to prevent loot of public money. Case of wilful default, fraud, malfeasance should entail serious consequence for the promoter. The Indonesian effort failed partly because political interference and xenophobia made things worse. Distinct advantage is that sale from PSB may happen sooner than later as fear of government agencies haunting bankers will not be there.
To say that banks are supposed to recover and there is no need to have a bad bank is only to ignore human aspect of any policy and its ramifications on the morale and psyche of the bankers. Success in any case depends on how those tasked with its implementation perceive and implement it.
Legal system has to be made accountable to deliver as errant borrowers will not fail to frustrate the attempt of bankers. Let’s not ignore the corruption in legal system in Indonesia which frustrated the effort to cleanse the system.
After the stressed assets are hived off, banks may be encouraged to lend for growth after they have learnt some lessons from the fiasco .The IBA needs to think as to how a banker should perform to avoid such a situation from arising in future. Bankers themselves should find ways to beat crony capitalism that may try to rear its head again.
The author is a visiting professor, NIBM and former executive director, UBI. Views are personal