There is perhaps not much that the finance minister can do in today’s Budget to deal with the rising bad debt problem of banks, other than provide for enhanced capital infusion into government-owned banks and, possibly, set a firm timeline for bringing in a comprehensive bankruptcy and insolvency code. Both these measures may provide symptomatic relief, but will not be enough to ensure a lasting solution to the NPA issue. Pumping additional capital into PSBs may postpone the crisis, but given that these banks require more than ₹2 lakh crore by way of additional capital over the next three years, and the Centre has only assured ₹70,000 crore, their ability to sustain operations going forward remains doubtful. A comprehensive bankruptcy code, which clears the maze of overlapping regulations currently covering the issue and sets a firm 180-day deadline for resolution of disputes, will give banks enough room to secure receivable assets. Under current laws, where it takes a minimum of four years to wind up a company and where civil disputes can drag on for decades, even victory in court for lenders is often hollow, given the eroding value of assets by the time a resolution is reached.
However, the deeper systemic problems, which have led to a recurrence of NPAs despite periodic efforts at clean-up, remain to be addressed. As Parliament’s Standing Committee on Finance observed in its report last week, the high incidence of NPAs (gross NPAs of just 39 publicly listed banks rose to ₹4.38 lakh crore in the December quarter of 2015) “obviously raises serious questions on the credibility of the mechanisms to deal with NPAs and stressed loans”. Expressing its unhappiness at the failure of the regulatory and oversight mechanisms, it further observed: “The Committee are thus not happy with the management of the problem on both fronts viz at the level of the RBI and at the level of the banks. The banks have evidently failed to notice the early signs of stress on the loans disbursed by them.”
The panel is quite right. Sporadic and piecemeal efforts, such as the RBI’s diktat to clean up the books, which led to a sharp uptick in write-offs and losses booked by PSBs in the previous quarter, or the more recent move to publicly name wilful defaulters — state-owned lender Punjab National Bank declared 900 entities that collectively owed the bank over ₹11,000 crore as ‘wilful defaulters’ last week — are meaningless unless adequate follow-through action is taken. This would require both legislative and structural reform of PSB managements as well as a change in attitude on the part of the RBI. But the biggest change lies purely within the purview of executive action. Unless the Centre comes up with a credible plan to strengthen management and governance in PSBs and divests control, ‘crony banking’ and NPAs are here to stay.