THE OTHER SIDE

After the ordinance issued earlier this month to expedite the resolution of “stressed assets” (nonperforming loans or NPAs) of the commercial banking system, and the larger role assigned to the Reserve Bank of India, I was reminded of the experience of the Credit Authorisation Scheme (CAS) introduced in 1965. It required the central bank’s clearance before any loan beyond ~1 crore sanctioned by a commercial bank could be released to the borrower. CAS continued for a couple of decades with periodical increases in the clearance threshold. In 60 years of observing the RBI, the only time I remember corruption allegations being made against its officials is when the CAS was in force.

The reason for remembering this old history is the expanded role the ordinance envisages for the RBI in the process of debt restructuring and write-offs by lender banks. As our editorial director A K Bhattacharya has outlined in an article in this paper (“Getting rid of an albatross”, May 9), the procedure involves:

The Union government “to direct the RBI to take necessary steps to initiate the NPA resolution process once a default has been established”.

Before this, the government “has to establish the incidence of a default as defined in the code”.

The RBI can “set up oversight committees for banks with NPAs that remain a matter of concern requiring early resolution”. Introducing yet another layer in the decision-making process?

The scheme is expected to expedite the resolution process, particularly in cases of consortium loans where the recalcitrance of a few banks, perhaps out of worries about the vigilance mechanism or lack of capital, to agree to the write-offs needed to restore a viable financial structure, delays the whole process. The RBI blessings may well relieve banks of vigilance worries, but will they merely be transferred to the RBI, if the experience of the CAS is any guide?

I, for one, am not clear about where exactly the National Company Law Tribunal, the Appellate Tribunal, the Insolvency and Bankruptcy Board of India (created last year) find a place in the totality of the structure. The experience of the Debt Recovery Tribunals and the Banks Board Bureau suggests that it is easier to create institutions than make them effective. No wonder, we rank 178 (out of 189 countries) in global contract enforcement — and every loan is a contract between the lender and the borrower. Even otherwise, at first sight, the process seems complex, involving too many authorities and committees. One will have to wait and see.

Some commentators have advocated privatisation. To my mind, this will help in one way — to eliminate the fear psychosis generated by the vigilance and audit systems to which public sector organisations are subject. This delays decision-making and adds to NPAs, which can best be resolved by prompt action. I have often wondered how many cases of fraud, corruption or negligence the Central Vigilance Commission and the Comptroller and Auditor General of India have really traced in public sector banks in, say, the last five years. But this apart, we should not forget that private banks are not necessarily better managed: Several in India have had to be merged or rescued. And the 2008 global financial crisis, which led to the largest output drop since the 1930s, tells its own tale.

Will tightening of provisioning norms help? The banking supervisor recently tightened norms for the telecom sector. To the extent that this draws pointed attention of the top management, it is probably useful. But there are unintended consequences as well. Additional provisioning (and the new accounting standards) reduces capital and the bank’s ability to lend. Another major problem would be farm loan write-offs. A few states have already announced this and even a high court has ordered waiver of all from loans.

The missing variable in all this is the creation of a “bad bank”, and commitment of substantial public funds to the system. This will become all the more difficult after the Fiscal Responsibility and Budget Management review committee’s report, which I commented on last week. I have since come across an IMF Working Paper (WP/14/34) full of mathematics, which concludes: “Our analysis of historical data has highlighted that there is no simple threshold for debt ratios above, because of which medium-term growth prospects are severely undermined. On the contrary, the association between debt and growth at high levels of debt becomes rather weak when one focuses on any but the shortest-term relationship, especially when controlling for the average growth performance of country peers.” Do we want to be more orthodox than the high priest?