Banking on Bad Debt
The wholesale and long-term banks are ‘banks’ only in the sense that they will hold the bad loans of other banks
The Reserve Bank of India (RBI) takes pains not to be misunderstood. If the hunger for clarity makes it clumsy, that is the reader’s problem; the RBI could not be bothered less. One of its conspicuously awkward inventions is wholesale and long-term finance banks. This is not entirely the RBI’s fault; it is a difficult—to be frank, confused—concept that it is trying to put across.
It has been dithering for at least a decade on licensing new private banks. Meanwhile, the bad debts—euphemistically called nonperforming assets—of old, mainly government banks, have skyrocketed. The finance minister admitted them to be Rs 6 lakh crore in the middle of 2016. Rating agencies and other observers think they are twice to five times as much—somewhere between a fifth and a half of every rupee lent.
So what the RBI has now thought of is a bank that would have two very different functions. First, it would take ‘priority sector assets’—that is, long-term loans banks have given to infrastructure builders who have defaulted—off the books of banks. Second, it would also take off small loans to unreliable businesses, ‘securitise’ them—that is, package them into relatively homogeneous bundles carrying similar risks—and sell them as packages.
To put it baldly, it would take from banks the bad loans they are passively holding and have neither written off, nor made borrowers cough up, nor chased them into liquidation, sold off their assets and realised whatever a firesale can raise. Realising the loans requires different strategies. The big borrowers have to be hounded through the judicial process until they pay, because they can afford expensive litigation. Small borrowers must be dealt with in a more informal fashion.
Why these new banks with a silly name? Because there is a job to be done—extracting money out of unwilling borrowers—and the banks will not do it. Let there be specialised machines for the job. The RBI calls them wholesale and long-term banks, but they are ‘banks’ only in the sense that they will hold the bad loans of other banks.
They will have no assets. They will require a lot of specialist staff—financial traders, lawyers, chartered accountants, for instance. Once they have liquidated the bad loans, these new institutions will have nothing to do. Experts will be reluctant to take a job with them. To say that now would be to kill them before they are born. So the RBI assumes and hopes that they will pick up normal banking business while they are collecting the bad debts.
The RBI does not define the essence of the new institutions and ask how to create them. It goes into the history of bank regulation and tries to find some way of relating the new institutions to the ones proposed by one committee or another. It looks across the globe for other countries’ way of dealing with the problem. It finds few useful lessons abroad, so it returns home to the job.
Then it lets the cat out of the bag; it turns out to be a pretty weird creature. It will be ‘universal’—that is, unspecialised, run-ofthe-mill—banks. But they will be set up by big business houses, which will be made to put in Rs 1,000 crore in equity into each bank, and give big, long-term loans for infrastructure—just the kind that went bad and made these new banks necessary.
Realisation of bad loans will be a side business for them. And why should they take on the thankless job? Because otherwise they will not get a banking licence. Will any business house take a licence on these terms? The RBI has tried and failed to attract any in the past. Let us see if it can this time. If not, it can prevaricate for another dozen years. The author is former chief economic advisor