How to tackle NPA crisis: With RBI-less banking

By: | Published: May 10, 2017 5:30 AM

Don’t let the fear of what could happen make nothing happen.” This statement aptly describes the conduct of a banker when it comes to recovery and restructuring of NPAs.

When a bank’s Board or Management Committee of the Board (MCBOD) sanctions it, then the role of other nominee directors need to be examined. (PTI)

Don’t let the fear of what could happen make nothing happen.” This statement aptly describes the conduct of a banker when it comes to recovery and restructuring of NPAs. The fear of 3Cs—CBI, CVC and CAG—has impacted the psyche of a banker and it will take a long time before this can be assuaged by some affirmative action of the government. In fact, SBI is on record saying that it would be better to restructure assets under the Insolvency and Bankruptcy Code rather than doing it within their own discretion for fear of being faulted in the future, so that these agencies don’t haunt a banker even after retirement or arrest a banker 5-10 years after she demits office or retires. This was a fallout of the decision of the CBI to arrest bankers who approved the loan, whereas Vijay Mallya, who is the beneficiary of the loan, is still cooling his heels in the UK.

When a bank’s Board or Management Committee of the Board (MCBOD) sanctions it, then the role of other nominee directors need to be examined. This exposes the lack of professionalism at Board-level committees, be it a recovery committee headed by a DFS director or the management committee of the Board tasked with the role of sanctioning credit limit to a borrower. The promulgation of the ordnance undoubtedly indicates seriousness on the part of the government to tackle burgeoning NPAs and shows the right intent of the government, but it misses out on the correct methodology in bringing out this change.

RBI had been tweaking restructuring schemes to facilitate bankers to launch frontal attack on these accounts, but to no avail. Now, asking RBI to nudge banks to recover/file insolvency is nothing but trying to micromanage banks. Here, clearly, it is conflict of interest in as much as RBI will not only ask banks to do but also inspect these banks to understand the efficacy of such a decision.

That banks are shying away from the responsibility of taking decision is well known, so the solution lies in addressing their concern protecting them from the adverse fallout of the bona fide decision. The owner should know how to motivate its employees to take decisions—be it a nominee director or selected MD/ED at the helm of affairs. The government need not select those who have a history of not taking credit decisions in their career. Such information is in public domain and needs to be an important criteria for elevation to that post.

Getting RBI to decide on the behalf of bankers will only make them averse to taking any action and just wait for RBI to direct them. This will further paralyse the decision-making process. If RBI and the government have their nominees on the Board, then it is expected of them to question the top management, making them act—a clear direction to a bank to shape up or ship out. When you look at the conduct of a government nominee director, you find their performance as a director is not monitored by the Department of Financial Services. Maybe they lack professional skills in some areas or don’t have sufficient time along with their job to play an effective role as a director. In such a case, the government needs to bring professionalism on the Board and not ask RBI to micromanage.

The Banks Board Bureau (BBB) could have been given this task. When a bank has to file insolvency as directed by RBI, then as per Section 52(1) of the Insolvency Code, 2016, the bank will have to take decision as to whether they forge their claim under the Sarfaesi Act and handover asset to an insolvency resolution professional (IRP) to have priority claim or to recover first under Sarfaesi and for residual amount have last priority under the Insolvency Code. Another issue that has not been brought out clearly under this code is with respect to a guarantor’s liability and recovery from a guarantor’s property, which is currently not charged to a bank. The guarantor gets time to deal with his property and intentionally weaken his net worth to avoid paying to a bank. There are a host of actions/decisions to be taken continuously in any case before the recovery/restructuring process is complete. Will banks look up to RBI to take a call or their Board will step in to guide, as the action has been triggered because of RBI mandate under Section 35AA of the Banking Regulation Act (this section has been added through an ordinance promulgated by the President on Friday, May 5, 2017).

The infrastructure of NCLT is not sufficient to tackle these cases. Its strength is grossly inadequate to deal with the pending cases in DRT which will get transferred to NCLT. The number of benches will have to be increased. At present, all DRTs have to be mapped to the NCLT bench where the case from a particular DRT will be transferred.
The efficacy of NCLT to hand out resolution in 180 days is to be seen. As per a report, there are 4,000 pending cases with the Company Law Board (CLB) that are expected to move to NCLT as the CLB stands dissolved. In addition, 700 pending cases at BIFR, 5,200 winding-up and amalgamation cases in high courts and 15,000 cases at DRT related to corporates are expected to be transferred to NCLT. But with just 11 benches and 62 judicial and technical members, NCLT will not be able to handle the mountain of pending cases.

The solution lies in authorising the BBB to have a number of overseeing committees (OC) of eminent bankers and professionals to give comfort to the bankers and make bankers take decision without favour or fear, and be responsible for it without any witch hunt against the bona fide acts of such executives. Allow bankers to do banking and create an enabling environment for efficient discharge of their functions by strengthening laws and plugging loopholes which are exploited by errant borrowers.

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