Five questions about the new move on NPAs

About 10 days ago, the government took one more step, in a long list of attempts, to “resolve” the problem of bad loans. This time it is an ordinance, which adds two new sections to the Banking Regulation Act empowering the Reserve Bank of India (RBI) to act on non-performing assets (NPAs) or bad loans. Investors and businessmen have duly cheered this move as another strong step, from a nationalist, determined and purposeful government. But what exactly do the two new sections say? Under Section 35AA, the central government may authorise the RBI to issue directions to banks to initiate the insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016. Section 35AB says that the RBI may issue directions to banks for a resolution of stressed assets and that the RBI may specify authorities or committees to advise banking companies on this. In short, the amendment only says that the central government will tell the RBI to tell the banks about the need “for resolution of stressed assets”. The second section is weaker still: Appointment of a committee to advise banks. Does it change anything about either the direction or speed of resolving bad loans? Here are some questions worth pondering on:

• What happened to the previous moves of this government such as two Gyan Sangams, Indradhanush, and Bank Board Bureau and the six schemes of the RBI to find solutions to the NPA problem? Was there any analysis of the outcomes? Will all these initiatives be dropped now?

• The Indradhanush plan, announced about two years ago for public sector banks (PSBs), covered better senior appointments, setting up a Bank Board Bureau (BBB), pumping in more capital, reducing bad loans, empowering the management, improving accountability, and better governance. Writing in this paper, I highlighted some major problems with the idea at that time. Of the seven, the government acted on just three things that were easy to do and have little connection to the core problems that beset PSBs. One, a half-hearted attempt to fill the top-level appointments; two, injecting a bit more capital. Later, it created the BBB, which is an organisation looking for a role. Four other points of the Indradhanush looked rather woolly, I had said: reducing bad loans, empowering managements, improving accountability, and better governance.

• If “empowering managements” is another name for creating confusion, the government is doing very well. In an erratic move, the government suddenly decided to play the musical chairs game with the heads of some banks last week. The head of IDBI Bank, which is in a big mess, has been sent to Indian Bank, which is among the best PSBs, having been led by good leaders successively over the last 10 years. The new chairman promptly talked of stepping up corporate lending, even though staying away from mindless corporate lending is what has kept Indian Bank out of trouble. The heads of Punjab National Bank and Bank of India have been sent to much smaller banks without explanation. It is seen as a demotion. How does this help the new banks they have been shifted to? A few months ago top bankers of IDBI Bank including the former chairman were arrested by the Central Bureau of Investigation for alleged corruption. While nobody condones corruption, ownership and the control structure in PSBs are so weak that this move has paralysed their managers.

• Against this background what exactly will the RBI do with the two new clauses? To understand this, please look at what Section35 already contained. In a nutshell, the RBI can inspect and scrutinise the books of any bank and can examine on oath any director or employee of any bank. Banks are obliged to fully cooperate with it. Based on the RBI’s inspection report, the central government can stop a bank from accepting deposits or even order their winding up. Could the RBI have used its powers when bad loans were escalating in PSBs? Most certainly. Has the RBI ever done it in the three periods when bad loans skyrocketed such as the 1980s, early 2000s and now? No. Will adding two new and vague sections stir the RBI into action? Unlikely. Does the RBI even have resources to control or resolve NPAs?

• Finally, what remains of the role of bank directors and bank managements in tackling not only the stock of bad loans but the rising flow of further bad loans? If RBI directors on bank boards have watched the slow deepening of the bad loan crisis without being able to do much in the past, what will make them act in future?

Businesses do well if they have in-built incentives that motivate employees. It is perhaps too radical for this government to set up such a system for PSBs. The ordinance tries to fix the business of PSBs by an external fiat on a reluctant regulator. How bizarre is that? If you are expecting any better outcome from this latest move, you believe in miracles.
 

The writer is the editor of www.moneylife.in

Twitter: @Moneylifers