Unshackle banks from credit cycle

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Unshackle banks from credit cycle

Monday, 11 February 2019 | Uttam Gupta

The Insolvency and Bankruptcy Code is an important legislation that has instilled a sense of urgency among all stakeholders to resolve bad loans but for the momentum to sustain, India needs a committed leadership

Banking is inherently a huge profitable business. To get a sense of it, all one needs to do is to look at the thousands of crores of rupees that a bank receives in various savings account on which it pays a meager 3.5 per cent to 4 per cent interest and earns a minimum of 10 per cent by way of lending. Even on account of funds, it garners by way of term deposits — 6.25 per cent to 7.5 per cent, depending on the period. There is enough room to make good money.

Yet, Public Sector Banks (PSBs) have registered huge losses in recent times, leading to erosion in capital and impairment of their capacity to continue lending. Eleven out of a total of 21 PSBs have been put under Prompt Corrective Action (PCA) framework that puts restrictions on their deposit taking and lending activities.

An overriding reason for this anomalous situation is mammoth loans that were not paid back. These dues, known as non-performing assets (NPAs) in common parlance, are an offshoot of indiscriminate lending, especially during 2008-2014, to those patronised by the ruling establishment without conducting due diligence.

If a bank has a major slice of funds simply going down the drain (forget interest, the principal amount, too, is not recovered), even high margin (difference between lending rate and cost of funds) won’t be of any help to keep their balance sheets in good shape. So, the banks plunged into a crisis-like situation.

The Modi dispensation has initiated all necessary measures viz, legislative, administrative, investigation and prosecution, to make an onslaught on mounting NPAs. At the core of the reform measures is the Insolvency and Bankruptcy Code (IBC) — a law enacted by it two years ago — which strikes all the right notes and provides for timely resolution of bad loans.

From the day an account registers NPAs, the banks get six months to either get the defaulting borrower pay up or his assets be transferred to the new owner who can pay it up. On its expiration, the case is referred to the National Company Law Tribunal (NCLT), which gets six months to complete the resolution process; extendable by three months under extraordinary circumstances.

This prompts all stakeholders viz, Committee of Creditors (CoC), bidders/suitors and judicial authorities, into action mode so that the capital embedded in the enterprise is conserved and resolution yields maximum value. The time limit of six (plus three) months forces them to deliver results expeditiously.

So far, banks have recovered over Rs 350,000 crore, including Rs 200,000 crore for settlement of 4,452 cases at the pre-admission stage and Rs 150,000 crore under IBC (Rs 80,000 crore already recovered and Rs 70,000 crore expected to be recovered during the remaining months of the current fiscal). This is over one-third of the total banks’ NPAs of about Rs 1000,000 crore.

Together with reining in fresh slippages (courtesy drastic changes in the eco-system of lending with an emphasis on due diligence for loan sanction, transparent processes and prompt reporting of large defaults), this has helped reduce gross NPAs from 11.5 per cent as of March 2018, to 10.8 per cent in September 2018. This is expected to further decline to 10.3 per cent by the end of the current fiscal.     

The NPA scenario in our country is expected to show further sustainable and substantial improvement. Confidence stems from the fear put by the IBC architecture in the minds of defaulting borrowers that they would loose ownership and management control of the company if they do not turn up to clear the dues. So, defaulters will have to pay up. It also forces the debtor to chase the creditor instead of the latter chasing the former (as it happened in the past) to get the dues cleared.

However, for momentum to sustain, India needs a committed leadership. Things could be difficult if a new regime takes charge in May this year, leading to a return to the old days when PSBs were made to give loans on considerations other than the commercial viability of the project. 

To reduce vulnerability of the system to the political leadership, there is an urgent need to give  autonomy to the PSBs and minimise political and bureaucratic interference in their working. For this, the Union Government should relinquish majority control by lowering its share holding to less than 50 per cent.  

The NDA dispensation, under the then Prime Minister Atal Bihari Vajpayee (1999-2004), had mooted reduction in its share in PSBs to less than 50 per cent initially and eventually to 33per cent. Recently, a committee, set up by the Reserve Bank of India (RBI) under P Nayak, also recommended reducing its share to below 50 per cent and housing the residual shares in a holding company. 

The Government may transfer its share — along with associated rights and responsibilities — to a banking investment company. After the banks turn robust and healthy, it should consider at an appropriate time (when their market capitalisation improves) divestment of the majority holding. The shares should be distributed in a way so as to avoid concentration of holding in a few hands and, hence, ensure that the management has greater accountability to the public.

This indeed should be the way forward to enable the banking sector meet the credit needs of the Indian economy, to put it on a high growth trajectory and for the creation of more jobs in our country.

(The writer is a freelance journalist)

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