RBI Moots ‘Tough Love’ for Banks with Bad Loans

Deputy gover­nor sug­gests two as­set man­age­ment com­pa­nies and rat­ing agen­cies for val­u­a­tion of stressed as­sets

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Mumbai: The Re­serve Bank of In­dia is propos­ing its tough­est mea­sures yet to re­cover loans from de­fault­ers by pre­scrib­ing De­cem­ber dead­line for the loan re­struc­tur­ing of top 50 de­fault­ers in a way that the as­sets turn vi­able and also in an en­vi­ron­ment where vig­i­lance de­part­ments do not sti­fle the right eco­nomic out­come.

Pick­ing up from where for­mer gover­nor Raghu­ram Ra­jan left, Deputy Gover­nor Vi­ral Acharya pro­posed set­ting up two as­set man­age­ment com­pa­nies, one pri­vate and the other quasi with gov­ern­ment stake­hold­ing, and two rat­ing agen­cies back­ing for val­u­a­tion of stressed as­sets.

The rate of bad loans have come to


such an alarm­ing level that banks should be shown some ‘tough love’ by bar­ring those non-per­form­ers from tak­ing de­posits and lend­ing. In some cases, merger of banks should also be con­sid­ered to re­duce de­pen­dence on gov­ern­ment cap­i­tal.

“This sit­u­a­tion should be a cause for con­cern to all of us,” Deputy Go- ver­nor Acharya told an au­di­ence at a con­fer­ence or­gan­ised by the In­dian Banks As­so­ci­a­tion. “It is rem­i­nis­cent of weak banks and stag­nat­ing growth wit­nessed by Ja­pan in the 1990s, with reper­cus­sions to date, and by Italy since 2010. Ja­pan has ex­pe­ri­enced, and Italy, is in my opin­ion ex­pe­ri­enc­ing, a lost decade. I be­lieve we are at cross­roads and ha- ve an im­por­tant choice to make.”

Acharya has been an ad­vo­cate of pru­dent prac­tices and a quick clean-up of bad loans mess. He has been an ad­vo­cate of bad bank, but has since aban­doned the phrase since it con­veys a dif­fer­ent mes­sage, though the idea re­mains.

“I have pre­vi­ously used the phrase “bad bank” for such ideas, over time I have come to dis­like the ti­tle,” he said. “A ‘bad bank’ con­veys the im­pres­sion that this en­tity is to op­er­ate as a bank but has bad as­sets to start with. In fact, the idea is not to op­er­ate these en­ti­ties as banks at all. Res­o­lu­tion agen­cies set up as banks that orig­i­nate or guar­an­tee lend­ing have ended up be­ing fu­ture reck­less lenders.”

But the bank­ing in­dus­try, which has been strug­gling, ap­pears to be wait­ing for some words to trans­late into ac­tion at the reg­u­la­tory as well as the gov­ern­ment level.

“Many bits and pieces of this had been rec­om­mended. Maybe not in the frame­work in which it was given, but many of this had al­ready been rec­om­mended by the banks,” said Arund­hati Bhat­tacharya, chair­man, SBI. “Cer­tain things are def­i­nitely new. For in­stance get­ting a credit rat­ing of the re­struc­tured as­set is new, so also re­gard­ing the cap­i­tal­i­sa­tion... so def­i­nitely these are un­der con­sid­er­a­tion, but how se­ri­ously, or what is the gov­ern­ment’s thought on all of this, I have no idea.”

In­stead, to solve the dis­tressed loans prob­lem in In­dia, es­ti­mated to be reach­ing as high as 20% of the to­tal loans, two sep­a­rate as­set man­age­ment com­pa­nies could be set up, Acharya sug­gested.

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