Clean­ing the mess

Banking Frontiers - - Editor’s Blog -

The re­cently pro­mul­gated or­di­nance to amend the pro­vi­sions of the Bank­ing Reg­u­la­tion Act of 1949 is a wel­come leg­is­la­tion for the bank­ing fra­ter­nity. It pro­vides enor­mous pow­ers to RBI to in­ter­vene in is­sues re­lat­ing to dis­tressed as­sets of banks, in­clud­ing di­rect­ing banks to file bank­ruptcy cases against de­fault­ers with­out even hav­ing to wait for the manda­tory pe­riod of time for a de­faulted loan to turn into a NPA. The gov­ern­ment is clearly plac­ing the re­spon­si­bil­ity of sort­ing out the NPA is­sue on RBI.

Banks have hith­erto been hes­i­tant in ini­ti­at­ing pe­nal ac­tion on de­fault­ers or squar­ing up bad debts fear­ing there could be reper­cus­sions, in­clud­ing en­quiries by vig­i­lance and crim­i­nal in­ves­ti­ga­tion agen­cies. The or­di­nance re­moves this ap­pre­hen­sion. It has pro­vided for the set­ting up of a com­mit­tee by RBI to de­cide on the price of a dis­tressed as­set and on the buyer of this as­set. The de­ci­sion of the com­mit­tee would there­fore be con­sid­ered as above board.

What seems both­er­some is the ex­ec­u­tive role that is ex­pected of the RBI. Reg­u­la­tors the world over are es­sen­tially framers and im­ple­menters of mon­e­tary pol­icy. They en­sure con­sis­tent growth in the econ­omy, bring about sta­bil­ity of the fi­nan­cial sys­tem and un­der­take print­ing and distri­bu­tion of cur­rency. Re­solv­ing NPAs is nor­mally not part of their port­fo­lio. It is also not a cen­tral bank’s job to be tak­ing op­er­a­tional de­ci­sions and im­ple­ment­ing them. And cen­tral banks have lim­ited in­fra­struc­ture to en­force de­ci­sions with re­gard to banks’ NPAs.

But, In­dian banks are fac­ing ab­nor­mal times. They are in a vir­tual NPA trap and ex­ist­ing le­gal frame­work has proved to be in­ef­fec­tive in re­solv­ing this cri­sis. The gov­ern­ment has rightly thought the reg­u­la­tor is the cor­rect en­tity to in­ter­vene.

RBI has been as­sum­ing proac­tive roles in the past, es­pe­cially un­der the regimes of the last cou­ple of its gov­er­nors. It was in fact gov­er­nor Raghu­ram Ra­jan, who brought out the NPA mal­ady in the banks in the first in­stance and gave an ul­ti­ma­tum to them to clean up their bal­ance sheets. Nat­u­rally, RBI should lead from the front in times of cri­sis and en­sure that there is res­o­lu­tion. There are also ex­am­ples of cen­tral banks in var­i­ous coun­tries in­ter­ven­ing in crises and set­ting things right.

The goal is to over­come the cri­sis that is NPAs. It is the gov­ern­ment banks that are the worst-hit and if the gov­ern­ment thinks the reg­u­la­tor can do well in res­ur­rect­ing the sit­u­a­tion, it has ev­ery right to di­rect RBI to un­der­take this task.

What is re­as­sur­ing is that hence­forth there would be no un­wanted vig­i­lance in­quiries and threats of pros­e­cu­tion on bank em­ploy­ees as any ac­tion to clean the mess will have the stamp of ap­proval of the cen­tral bank.

N. Mo­han

Mo­bile : 9322895820 Email : mo­han@bank­ingfron­

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