Tuesday, March 22, 2016

Banking distress: containing the damage

FM Arun Jaitley has moved to contain the damage to morale in PSBs by emphasising recently that bad loans at PSBs are substantially the result of larger economic factors, they don't always point to bad decisions:

But there are also some other issues due to which non-performing assets have added up in the banking system," he said, adding that some genuine economic reasons for the delays in repayments to banks needed to be dealt with. In steel, he said, it was dumping by China. In sugar, it was low global prices, while in power, it was indiscriminate moves by some states to sell electricity below cost, forcing distribution companies to resort to borrowing. In highways, it was poor policy implementation that had crippled the sector, Jaitley said, listing the reasons for the rise in bank NPAs.

These observations are welcome. I am inclined to think, however, that much damage has already been done by strong statements made by people at the top and also by the media coverage of the issue. I would imagine that fear psychosis is pervasive and PSB bankers would be reluctant to lend to large corporates and especially for infrastructure. It does not help at all that the CBI has swung into action.Since the NPA position can't be tackled without fresh funds coming and projects moving towards completion, it does look as though the problem is going to stretch out for a while.

What can be done with stressed assets? Well, broadly there are three options:

i. Identify cases where the stress has happened for genuine reasons. In these cases, banks should take a hit and fresh money should come in. But PSBs will be most reluctant to do so in the present atmosphere. I would suggest that the government set up a Settlement Advisory Board comprising ex-bankers, chartered accountants, academics and others to vet loan settlements above a certain value. That would give bankers the courage to move ahead.  Fresh funds can come either from the banks or the National Infrastructure Investment Fund.

ii. Use SDR to convert debt into equity, dislodge existing promoters and management and bring in new promoters. This sounds fine in principle but it hasn't happened in a single instance so far. Borrowers can stymie such moves by approaching courts. Bankers don't have the expertise to find fresh promoters. Again, if new promoters are to come in, valuation issues will arise. I don't think SDR will work/

iii. Government takes over some of the stressed assets, completes the projects and repays banks' loans. So, for example, NHAI could take over road projects, SAIL could acquire steel projects, NTPC could acquire power projects and so on. The key issue is: do they have the ability to complete the projects in their present condition? In some cases at least, this is worth exploring.

While resolving stressed assets, we need to ensure that systems are strengthened so as to avoid a repetition of past mistakes. The Bank Board Bureau must professionalise bank boards and induct high quality people as MDs. The BBB is not as envisaged by the P J Nayak committee. The Nayak committee wanted a BBB without any government representatives. That is completely unrealistic in my view. Government as the owner has to take the lead in making appointments. The job of the BBB Chairman and other members is to ensure that the government gets these appointments right. But much depends on the intentions of the government.

The BBB is no merely the old Appointments Board minus the RBI Governor. The Appointments Board could not prevent wrong appointments. So the onus really is on government to make the right choices. One hopes that the present crisis brings out the best in government as crises typically do.

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