RBI’s discussion paper on NPAs
The
discussion paper on Non Performing Assets of banks has brought out the Proposals for 1) early formation of a
lenders’ committee with timelines to agree to a plan for resolution. 2)
Introduction of incentives for lenders to agree collectively and quickly to a
plan – better regulatory treatment of stressed assets if a resolution plan is
underway accelerated provisioning if no agreement can be reached. 3) for Improvement in current
restructuring process: Independent evaluation of large value restructurings
mandated, with a focus on viable plans and a fair sharing of losses (and future
possible upside) between promoters and creditors. Proposals also have a
provision to make the future borrowing more expensive for borrowers who do not
co-operate with lenders in resolution. Further, the proposal provides for more
liberal regulatory treatment of asset sales etc.
It may be observed in this context that all the proposals
suggested above involve lot of cumbersome procedures, expenditures and
considerable time without leading to any tangible result. In fact this sort of
approach is what exactly the borrowers want and they will be too happy if the
RBI’s implements the same. This exercise will turn to be futile and can end up
in officially camouflaging more NPAs and weakening the advance portfolio of
banks and their balance sheets
RBI being a regulator of
banks and being the monetary authority of the economy cannot and should not
tolerate unhealthy balance sheets of banks, large corporates and the economy.
Bad assets do not contribute to the economy is a fact which cannot be allowed
to continue for ever. It affects the economy badly and all its stake holders.
SEBI has also a major responsibility to ensure that by any reckoning defaulting
companies should not get listed in the Stock Exchanges and they should never be
allowed to raise capital through IPOs or other means. The Corporates should
have excellent ratings from banks and these ratings should reflect on the
conduct of loan accounts. These ratings should be made transparent by banks and
should be made available for all having dealings with the Corporates. The time has come to discipline both banks
and borrowers to ensure that the loans turn productive in the larger
interests of the economy, the financial system, and all its stakeholders.
The need to prevent
formation of Non Performing Assets in banks in the interests of all
stakeholders of banks who include depositors, good borrowers and shareholders
is paramount and is long over due. The responsibility for recognition,
resolution and recovery of bad assets is basically with the bankers and the
borrowers and they cannot be casual and careless in their dealings.
NPAs are in effect the
creation of banks and the borrowers and are definitely avoidable if the banks’
Board and the borrowers are disciplined.
This can be on an ongoing basis and the borrowers can be rewarded or
punished if they deviate from bank's disciplinary requirements and attempt
to hoodwink the banks with their erratic behavior and conduct of accounts
leading to formation of non performing loans. The Reserve Bank as a
regulator of banks can make the Board responsible and can penalize the banks
for their failure in the proper sanction and conduct of loan portfolio. The
erring borrowers can be identified easily by banks and they can be brought
under proper discipline by making them to pay a penalty based on their
irregular conduct of accounts and deviation from the discipline envisaged.
These penalties over a period would be adequate to cover up the losses on
account of bad assets. The provisions presently levied towards bad loans can be
minimized and the money saved on provisions can be passed on to the depositors
and other stake holders. The write off of loans now resorted to by banks at the
cost of tax payers' and the depositors' money can also be considerably
brought down. If the borrowers are disciplined by way of levying some penalty
and a separate fund is built up by banks, the banks can have a cushion to cover
the formation of NPAs without taxing any other stake holders of banks. The
basic approach of the bankers is to discipline themselves in the selection of
borrowers, grant of loans, coverage of securities, monitoring and supervision
of loans, etc and enforce discipline on borrowers in a constructive manner.
Borrowers are partners in business and their healthy growth should reflect in
banks balance sheets. Likewise, their deterioration in health should not affect
banks balance sheets and other stakeholders. Unless and until a built in
mechanism is put in place, there cannot be an effective control on the
defaulting borrowers. The present moral hazard of PSU banks that the Government
will rescue them with induction of additional capital also needs to be
dispensed with.
Healthy banking is the need
of the hour to support the sagging economy and a small section of bad borrowers
should not be allowed to take the banking system and the economy for a ride. The
Reserve Bank should have a rethinking on the discussion paper and a viable,
simple and practical solution acceptable to all stakeholders of banks who
include the Government, depositors, borrowers, shareholders and others is put
in place. The issue of NPAs should never be the subject matter of discussion in
future. Let the banks and borrowers deal with the prevention of formation of NPAs effectively under the guidance of
the RBI.
Dr.T.V.Gopalakrishnan
Bangalore
26/12/13.
