A bankable idea

The crackdown on high-profile defaulter Vijay Mallya may be making headlines, but there can be no escaping the urgent need to stem the rising tide of gross non-performing assets (at 9 per cent of bank lending or 4.5 per cent of the GDP, it amounts to ₹6.75 lakh crore and mounting). These have applied the breaks on lending by banks and investment by the indebted corporates concerned. Private investment had actually started to shrink by 2015-16 and in 2016-17 “so far it seems to have contracted by more than 7 per cent”, the Economic Survey 2017 notes. Clearly, the approach to NPAs cannot be business as usual. Acknowledging that the RBI and the Centre are running out of options, the Survey has mooted a none-too-novel idea of a ‘bad bank’, the Public Sector Asset Rehabilitation Agency (PARA), with 49 per cent government ownership. It appears that earlier efforts to clean up the mess and start on a clean slate — the 5/25 scheme, strategic debt restructuring and S4A (or Scheme for Sustainable Structuring of Stressed Assets) and private asset reconstruction companies — have not helped enough. PARA is expected to clean up the balance sheets of banks, leaving them free to lend without encumbrance, even as they are recapitalised to the extent of the write-downs. It appears that the Budget set aside only ₹10,000 crore for bank recapitalisation, against last year’s ₹25,000 crore, with a view to arriving at greater clarity on the problem before committing the money. RBI deputy governor Viral Acharya has observed that a ‘bad bank’ will have to be “designed right” for it to work.

There are over 20 asset reconstruction companies (ARCs) in operation, many of them private players. Private ARCs, according to the Survey , have not picked up more than 4-5 per cent of the book value of the NPAs. This is because public sector banks, on the one hand, are not willing to write down losses to the extent that the ARCs would like, fearing vigilance repercussions, while on the other the ARCs cannot offer more when asset “resolution” is difficult. It remains to be seen how PARA will work where others haven’t. A fine balance between institutional accountability and autonomy is called for. While PARA, as a government-owned entity, may be able to bring various creditors on board to agree on write-downs, it would also have to show urgency in recovering the monies. Even with the bankruptcy code coming into play, enabling the judiciary to put an end to protracted liquidation proceedings, PARA must be guided by an approach to revive industry wherever possible.

The RBI governor has rightly pointed to the need for “pragmatism” in dealing with the fraught issue of NPAs. This entails the recognition, as spelt out in the Survey , that NPAs are “an economic problem, not a morality play”, the shenanigans over Mallya notwithstanding. Ultimately, the objective should be to get credit growth back to double digit rates, with checks and balances to deal with irregularities.

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