Reserve Bank of India governor Urjit Patel has done the right thing to rule out any dilution in the norms for bad loans in the face of lobbying by banks and Members of Parliament. Stringent rules make sense when serious attempts are being made to clear the bad loan mess, putting the bankruptcy code to use. Regulatory forbearance will be a throwback to bad old days of disguised loans, especially in public sector banks, that were often arm-twisted by promoters who had clout with the political class. Some years ago, the RBI, in its Financial Stability Report, had also cautioned that regulatory forbearance for an extended period caused a moral hazard.
Public confidence in India’s banking system has been shaken. A few instances of individual acts of commission or omission might not erode confidence in general. But easing norms and standards of provisioning for nonperforming assets (NPAs) will further dent public confidence in the banking system. At this moment, it is vital to shore up this confidence, and not erode it by colluding in the hiding of bank loans. Banks have to set aside more capital against bad loans. They worry that the revised rules will lead to a sharp rise in the share of bad loans in the March quarter—gross NPAs are expected to cross Rs 10 lakh crore.
The revised rules mandate banks to work on a resolution plan from day one of a default and put in place relevant plans within 180 days. If they fail to do so, the loan will be referred to the bankruptcy court. Also, a resolution plan will be considered valid only when all the consortium lenders agree, and the account will be upgraded only after the borrower repays at least 20% of the principal.
Bankers want easing of these rules, besides continuation of all other debt restructuring schemes. Rightly, the RBI has not budged, saying any dilution would only postpone the NPA problem. There should be zero tolerance on bad loans. The focus should be on swift resolution of corporate distress that will help clean up of banks’ books, bring discipline to corporate finances and governance as well.