Don’t politicise NPAs

A few days ago, former Reserve Bank Governor Raghuram Rajan made a lucid, objective submission to the Estimates Committee of Parliament on the issue of non-performing assets of public sector banks in particular. From his account, it appears that both the previous and present dispensations are to blame for the ₹10.3-lakh-crore NPA mountain (11.6 per cent of gross advances) as on March this year – even as there can be no denying that the implementation of the Insolvency and Bankruptcy code since mid-2016 has been a major step forward. While the Congress and the BJP trade charges over crony capitalism having created this mess, the truth is more complex; as Rajan puts it, “it's hard to tell exuberance, incompetence and corruption apart”. Hence, “irrational exuberance” between 2006 and 2008 caused the initial build up of bad debts in infrastructure sectors in particular, such as power and roads. Rajan, who was RBI Governor for three years till September 2016, admits that “until the bankruptcy code was enacted, bankers had little ability to threaten promoters with loss of their project”. However, he also observes that he had urged the PMO to investigate certain high-profile cases of fraud, on which he “is not aware of (the) progress”. The RBI’s Financial Stability Report (June 2018) observes that the top 100 large borrowers accounted for 15.2 per cent of gross advances and 26 per cent of the GNPAs (or gross NPAs) of scheduled commercial banks (SCBs). It also points out that if the top three individual borrowers of a bank fail to repay, the impact would be significant for five banks which account for 9.8 per cent of the total assets of SCBs. The populist clamour to bring top borrowers to book is, therefore, not without basis. In fact, the PV Narasimha Rao government even disclosed a list of top defaulters in Parliament. However, a more informed debate is called for.

The IBC process has brought in an element of transparency, while relieving bankers of the fear of being prosecuted for taking a haircut on their assets. While resolution is not proceeding at the pace envisaged by the RBI, the 300-day timeline is making a difference, when compared with the delays under the earlier regime of debt recovery tribunals. Efforts such as 5/25 scheme for infra projects and strategic debt restructuring, introduced during Rajan’s time, have not helped in asset revival or resolution; in the absence of a water-tight legal framework, promoters managed to get away. The “asset quality review” initiated by Rajan has helped in delineating the NPA mess.

Much depends on the transparency and efficiency of the IBC process, with the RBI’s February 12 circular tightening the screws on defaulters. The Centre should stay the course, and not press for a dilution of the circular, which promises relief to the MSMEs. While encouraging banks to lend to agriculture and small units, big defaulters should be called to account.