Resolving bad loans

It requires empowering bankers, not more institutions

Last week, Reserve Bank of India (RBI) Deputy Governor Viral V Acharya suggested yet another way of resolving the bad debt problem stifling the banking sector. He proposed the creation of two asset management companies — one private and another quasi-government — instead of a single “bad bank”. As such, there should be a Private Asset Management Company (PAMC) and a National Asset Management Company (NAMC). The PAMC will tackle sectors in which the stressed assets have an economic value in the short term such as metals, engineering and procurement, telecom and textiles. The NAMC, on the other hand, will be for sectors in which the problem is “not just one of excess capacity but possibly also of economically unviable assets in the short- to medium-term”. For instance, the power sector, where projects have been created to deliver capacities beyond immediate needs. The central idea of Mr Achaya’s proposal was that the government should not bear the full cost of restructuring losses just because it is the majority owner of public sector banks. 

The suggestions come at a time when the level of bad loans has grown by 135 per cent over the past two years. Gross non-performing assets (GNPAs) of public sector banks are 11.2 per cent of their advances as of December 2016. A recent Business Standard analysis of 23 public sector banks has shown that at the aggregate level, the solvency ratio — the ratio of the banks’ net non-performing assets, or NPAs, to net worth — has risen to 63.1 per cent at the end of December, from 60.9 per cent at the end of March. This means, if banks were to provide for all these bad loans, it would wipe off 63 per cent of their net worth. These rising numbers also show the lack of effectiveness of the numerous schemes RBI unveiled in the two years to tackle bad loans. Be it the strategic debt restructuring (SDR) scheme, where banks were given an opportunity to convert the loan amount into 51 per cent equity, which was supposed to be sold to the highest bidders once the firm became viable; the sustainable structuring of stressed assets (S4A) scheme; or the corporate debt restructuring (CDR) — all efforts have yielded limited results at best. 

The central problem across most schemes has been one of incorrect or inadequate incentives. Banks are unwilling to take a haircut lest they are hounded by investigation bodies such as the Central Bureau of Investigation and the Central Vigilance Commission for favouring anyone. It is an open secret that despite the NPA problem growing each passing quarter, public sector bank heads find kicking the can down the road to be the safest option. Inadequate finances for recapitalisation further mars resolution. Evidently, Mr Acharya was aware of the problem when he said that “…there has to be an incentive provided to banks to get on with it”. However, while his suggestion furthers the debate on what could work, it is unclear how it will reconfigure the “incentives” for public sector bank managers. No wonder then, Mr Acharya’s proposal has not enthused most bankers who, in turn, warned his plan would add more complexity and delay any resolution. That is because what is lacking is not yet another institution or scheme. The key is to allow bankers the independence to sell assets at prices where there is a demand for them in the market.