RBI NEEDS TO BUILD CAPACITY FOR NPA RESOLUTION
The banking regulator should develop new competencies as well as strengthen existing ones, which includes access to data
Financial services regulators, worldwide and particularly in India, are known for their long memories about industry and company conduct. Their prime role is to ensure stability in the system and, thereby, the economy. Regulators do this by regular evaluation of conduct and maintaining a database of evidence to judge conduct. They also perform several other roles and exercise discretion based on the evidence available with it or with the industry to judge and regulate it.
The Indian banking regulator has been given an additional responsibility by the government vide the ordinance that amended the Banking Regulation Act, 1949, on May 4, 2017. On the following day, the Ministry of Finance came out with an order empowering the Reserve Bank of India to exercise its discretion with regard to non-performing assets (NPA). This provides one more strong measure or tool in its battle against NPAs.
The amended statute now provides the regulator wide-ranging powers for NPA resolution. This article focuses on additional capabilities and the data gathering framework, which could assist the regulator, including the oversight committee(s) in arriving at the resolution mechanism and size of haircuts required for different sectors and individual exposures. Several aspects associated with the challenges of NPAs will determine the data elements and data gathering, which would enable the regulator to determine a resolution mechanism.
At the core, we recognise that data on exposures is at present decentralised in the industry. This major flaw in our system has been over-utilised by wilful defaulters. In addition, we also realise that banking companies do not have a long memory. This is evident from the same sectors and borrowers seeking Corporate Debt Restructuring and other resolution with sizeable haircuts. The ability of the banking system to view these exposures with its associated quality and default probability at an aggregated level is conspicuous by its absence. This is evident from the JLF interfaces. Also, the smarter companies, with larger evidence and databases and possessing the ability to link it with recovery probability, manage to reduce their exposures at the time when ill-informed companies buy their exposures.
There is another major weakness in the system. Banking companies, particularly the public sector ones, have very weak economic and planning competencies. Many of them have evidence available with them, at a decentralised or informal level but not institutionalised. This reduces their ability to link the outcomes associated with policy changes in the economy and the ability to determine behavioural and recovery predictability. Steel and telecom are perhaps glaring examples before us. It is this weakness which the regulator addresses periodically through exposure limits and risk weightages. But it comes too late in the day. The companies themselves should be able to manage this and exposures deteriorate in quality.
The last major weakness is in the area of collateral management and recovery, particularly cases awaiting judiciary outcomes. Different banks have different quality of security and collaterals. Also, they may adopt different resolution processes with the judiciary system. An aggregated view of the recovery process for timely resolution demands collection of data/evidence to provide a better view and for controlling the process.
One may visualise the amount of data the regulator’s office will require and a new set of competencies required to be developed by the regulator. This will enable him to determine measures required for the resolution of sectoral and individual large exposures. At present, this data is available in a highly unstructured way, dispersed and decentralised with the banks. Cash flow projections for the challenging sectors or troubled large exposures is a case in point. This is one of several data sets required by either the regulator or the oversight committee(s) to arrive at resolution measures. The method of resolution and the size of haircuts required can be determined only on the basis of these data sets. It may also be noted that offices, which approve of such measures and critical decisions, will also require such evidence to be available to them. The fear of reopening or re-examination of such decisions by investing agencies at a future date may also loom large on their minds. Then again, the data is dynamic in keeping with the external environment. Exposure to steel is a case in point, the industry cash flows may look better now, compared with what they were a year ago.
Data gathering and its analysis will be required by the regulator in providing guidance to policymakers as well. This was always carried out by the regulator by way of periodic reports and monetary policy documents. This role will become more direct and sharper for the regulator in the future on the topic of NPAs. If we take the telecom sector as an example, then policymakers will have to have much more guidance and evidence, considering the banking sector’s exposure to the sector.
Several competencies, which may be available with the regulator’s office, will need review and strengthening. For instance, Tuesday’s circular requiring the financial lenders to take complete responsibility for large accounts amounting to more than 25 per cent of gross NPAs, gives an excellent example of the case in point. The associated long memory character of the office will go a long way in NPA resolution and make the sector healthy and financially sound.