There is no clarity on to how and why this will be different from the futile efforts of the last four decades in handling bad loans by government banks
India has probably lost count of the number of government committees set up to address corporate bankruptcy issues. We have had nine major government committees between 1964 and 2013, apart from several minor committees from time to time. One more committee headed by Sunil Mehta, chairman of Punjab National Bank, submitted its report last week to the energetic interim Finance Minister Piyush Goel, who labelled it Project Sashakt. Anyone who has some understanding of the bad loan situation and the pervasive government control over the financial system will see that the committee recommendations alone will do little to either reduce the stock of bad loans or prevent the creation of fresh bad loans. Indeed, by creating confusion over existing processes, most of the ideas will actually hinder bad loan resolutions.
Under the plan, for bad loans of Rs 500 million or less, banks will formulate a resolution plan within 90 days of their detection. There is no clarity on to how and why this will be different from the futile efforts of the last four decades in handling bad loans by government banks. However, there is plenty of clarity on how this undermines a circular issued by the Reserve Bank of India (RBI) issued last February, asking banks to report a bad loan to the RBI by the 91st day of it turning bad. If banks are going to resolve bad loans over another 90 days under Project Sashakt, just informing the RBI on the 91st day has no meaning. Indeed, according to some media reports, the committee has even suggested that the banks should give additional loans to the defaulter.
Since most cases of bad loans in public sector banks are a result of either inefficiency or corruption, you wonder what the real objective here is.
For assets between Rs 500 million and Rs 5 billion, “the lead lender should take charge and devise a resolution plan within 180 days”, recommends the committee, for which banks will enter into an inter-creditor agreement. All this is hope, not strategy. While resolution has slowed due to disagreements among lenders, allowing the lead lender to take charge will not achieve anything substantially different. Worse, the committee’s recommendation will simply vitiate and delay the resolution process. After all, under the Insolvency and Bankruptcy Code (IBC), banks are already supposed to act immediately after a loan goes bad and then vote through a committee of creditors. Why give another 180 days to banks and defaulters? How does this recommendation square with that of the statutes of the IBC? And where do the RBI’s various directives on bad loans stand in all this?
The committee says bad loans assets worth over Rs 5 billion will be handled by asset management companies (AMCs), which will supposedly be funded by banks, foreign funds, infrastructure investment funds, etc. This is wishful thinking. Guess how many asset reconstruction companies (ARCs) set up by the private sector already exist. There are as many as 24 ARCs specialising in bad loans, already registered with the RBI. Some of them are joint ventures with foreign firms. Why would India need more of AMCs/ARCs? Just because netas and babus want to show the country some fresh action? Where is the money for this? Since the government wants it, new ones would be set up mainly with public money from Life Insurance Corporation and public sector banks, no matter how wasteful and impractical the idea may be. Given this government’s approach, we may even see cash-rich government companies like Hindustan Petroleum being asked to contribute to the AMCs — all in the national interest.
The fourth idea is another pipedream: Alternative investment funds (AIFs) that supposedly will be created by institutional investors. Who are these institutional investors, if not government-owned insurance companies and banks, who have an interest in AIFs focused on bad loans? If private-sector AIFs and ARCs with a far greater focus and abilities have not seen much of an opportunity in this, what can public-sector AMCs and AIFs do? All this is a throwback to the glorious 1980s, the days of development finance institutions, Unit Trust of India and government-funded mutual fund and venture capital funds.
The deeper you look, the clearer it becomes that the committee’s recommendations undermine existing resolution processes and ignore the market realities of private initiatives such as ARCs, which would have flowered if they did not have to deal with a thicket of arduous rules, unaccountable bankers and unreliable corporate accounts. The best that can happen to Project Sashakt is that AMC and AIF ideas will remain dead in the water. If the recommendations are indeed implemented even a little bit, we will have turned the clock back on bad loan resolution. Surely, the bankers who sat in the committee and thought up these confusing and impractical recommendations knew what they were doing. I wonder what the real intention was here, since it mainly helps bankers and promoters who are responsible for the bad loans. Meanwhile, despite many visible initiatives by this government, we are yet to get one single idea that would break the corrupt nexus between the promoters and bankers of public sector banks (PSBs), which account for more than 90 per cent of bad loans.
The writer is the editor of http://www.moneylife.in