Thursday, December 26, 2013

RBI's discussion paper on NPAs -some views



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.

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