RBI Moots ‘Tough Love’ for Banks with Bad Loans
Deputy governor suggests two asset management companies and rating agencies for valuation of stressed assets
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.