The finance ministry reportedly wants the Reserve Bank of India (RBI) to ease the norms for bad loans, ostensibly to prevent mass corporate distress. This is a bad idea. Lengthening the period when companies are in a limbo between healthy and bankrupt only gives errant managements to siphon money out of their companies, and leaving less for the creditors.
The resolution process under the (IBC) was meant to change the paradigm of cronies waxing rich not by entrepreneurial flair or the sweat of their brow but by unhindered access to the public’s savings, accessed as loan and equity. It stood for a real threat of separating the promoter from the asset used to grab funds.
Swift recognition of bankruptcy is meant to realise this goal and reassign the distressed asset to those who can create maximum value from it, minimising the haircut that lenders need to take and reducing the recapitalisation burden of the government and taxpayers.
Stringent provisioning norms, that also require banks to set aside more capital against non-performing loans, are part of the paradigm. Banks want the NPA classification norm of one day to be extended to 30 days, and a relaxation in the rule that requires that all consortium lenders to approve the resolution plan. Any deadline bites, and could lead to demands for one more extension. Pray, why give that chance? Gross NPAs are estimated at around Rs 9 lakh crore.
RBI data shows that state-owned banks could recover about Rs 15,786 crore in 2016-17 and 2017-18 (till December 31, 2017). With the regulator scrapping other debt restructuring schemes, the focus of banks must shift away from lobbying for easier bad loan rules to effective use of the IBC to resolve corporate distress. That’s the best way to revive tiny enterprises as well.