Tuesday, April 04, 2017

A ray of hope on the NPA problem

It appears that the government will rely on the RBI to resolve the long-festering NPA issue. ET reports that the government may issue an ordinance to empower the RBI suitably. It appears that there is a ray of hope on the NPA problem.

It's not clear, though, how exactly the RBI will be empowered. It cannot be that the RBI proposes loan resolution because that would bring into conflict with its duties as a regulator, in which capacity it will have to examine whether loan settlement has been proper enough.

The ET report suggests that the RBI may operate through Oversight Committees. Presumably these will have professionals from outside the RBI and will act at an arm's length. My own preference would be for a Loan Resolution Authority- comprising former bankers, academics, chartered accountants, lawyers and other professionals of repute- created by an Act of Parliament. Such an Authority would vet loan proposals made by bank management.

Only then we will have any resolution- the paralysis in decision-making at public sector banks today is very real. PSB top brass have told me categorically that they will not sign off on loan resolution without suitable assurances that the investigative agencies will not come after them- say, ten years from now!

The creation of Oversight Committees (the equivalent of my Loan Resolution Authority) under the auspices of RBI should have happened long back. The reason it did not happen was thanks to the general perception that the NPA problem is the result of mala fides on the part of bankers. If you take this view, then resolution is not possible, we can only focus on retribution. Kingfisher Airlines is, perhaps, a case in point.

PSBs were seen as having messed up on credit risk management and many were seen as basket cases. So there was talk of mergers, sale to strategic investors, creation of a "bad bank", etc. It required the Economic Survey to point out that the problem is one of excessive exuberance on the part of firms and investors and hence on the part of bankers and that the NPA problem is a case of business judgement having gone wrong, with various extraneous factors such as the global financial crisis impacting on bank decisions in a big way.

Once you grasp this, you will also grasp that the way forward is not go after bankers but to empower bank management to resolve bad loans even while strengthening mechanisms of governance at PSBs.

More in my article in the Hindu today, Finally, action on bad loans?


Anonymous said...

But sir the basic premise of capitalism is creative destruction & incumbents would love to maintain their hegemony at any cost.Of course the problem lies somewhere in between bad luck & maleficence but if we are not able to solve this problem decisively this time then it will reappear again & again in some different form. Even irrational exuberance cant go unpunished & we precisely made a mess of our economy during licence raj by giving undue protection to our industrialists and thereby making them lazy & incompetent. Well timing here is equally important as we need to get out of it asap but certainly not via simply recapitalization as suggested by you in The Hindu.

Anonymous said...

Dear Prof.!

Looking forward foryour views on the new NPA resolution mechanism introduced by Govt.