Why push for a bad bank when NCLT working fine – The Financial Express–12.06.2018

Last year, when the Economic Survey made a pitch for a bad bank—Public Sector Asset Rehabilitation Agency (PARA)—the primary reason for doing so was that, with the shadow of the CBI/CVC/CAG over them, PSU banks would not be able to take decisions on haircuts that were vital if non-performing loans were to be sold. Under the Survey’s scheme, PSU banks would sell their bad loans to PARA at book value and PARA would sell these after taking the necessary haircuts. PARA would have a 49% Union government equity which would allow it to be free of CBI/CVC/CAG oversight, and perhaps another 10-15% of its equity would be held by an LIC in order to preserve its ‘government’ character.

There were, even then, some problems with PARA, but it seemed the best option available. So, for instance, if PARA was to take the huge haircuts required, why would any private organisation invest in it—under the plan, sovereign wealth funds were expected to invest in PARA—since the upside potential was limited? Also, if PSU banks, who had run up huge non-performing loans, were to be able to transfer their bad loans to PARA at book value, where was the possibility of disciplining them and ensuring they learned their lesson? Right now, with PSU banks having to make huge provisions for bad loans, they are running up losses and that is what is allowing RBI to restrict their operations under the Prompt Corrective Action (PCA) framework. PARA did not also address the elephant in the room, of there being too many unviable PSU banks, more so with private sector banks eating into their share of both deposits as well as lending.

Things changed dramatically, however, with the Insolvency and Bankruptcy Code (IBC) getting operationalised and banks auctioning off bad loans using the National Company Law Tribunals (NCLT). Of the original 12 cases that RBI asked banks to refer to NCLT, some have already been resolved and others are on their way. Contrary to the fears expressed, banks have been enabled to take bold decisions on haircuts since the process is being done in a transparent manner through an open bid—in which case, there is no question of the CBI/CVC/CAG coming after any banker.

Since the entire process is being conducted through the NCLT, which is a legal process, anyone who feels it is unfair or lacks transparency is free to petition the court and even the appellate tribunal if they disagree with the NCLT’s verdict. This has ensured that, while in the case of Bhushan Steel, a haircut of 27% was taken by banks, this reached a whopping 60% in the case of Electrosteel Steels. Certainly, the NCLT/IBC process can be improved—so, instead of having single bids which are then compared with one another, for instance, you could have multiple-stage bids of the type used in, say, India’s telecom auctions.

Also, the new IBC ordinance further tightens the auction process, to ensure that promoters of firms whose loans are non-performing are not able to wrest back control through various proxies. An additional problem with a bad bank is that it postpones critical decisions. A stressed power sector loan, for instance, becomes viable only after a big haircut—but if the asset is simply moved to a bad bank, there is less of an urgency to sell it off and, to that extent, it will take that much longer for the asset to become viable. A bad bank, at this point, is a bad idea, so it is best to drop it.

via Why push for a bad bank when NCLT working fine – The Financial Express

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