And so the juggernaut rolls on…… RBI issues a circular on 06th August’2020 laying down the resolution framework for dealing with COVID related stress which is further to the moratorium prescribed in March’2020 on interest payments and loan repayments.
Circa Feb’2018, RBI comes out with a Prudential Framework for dealing with stressed assets and the same is struck down by the Supreme Court in April’2019 for being ultra vires Section 35AA of the Banking Regulation Act. To address the changed circumstances, the RBI comes out with another Prudential Framework for stressed assets which is a much watered down version of the earlier one and suddenly promoters of stressed companies are able to heave a sigh of relief. The threat of insolvency proceedings no longer hangs over their head.
The current circular is just an attempt to kick the can down the road by another 2 years and may at least give the banks some time to raise the necessary capital to cover the bad debts which are inevitable. However what has remained consistent throughout this entire episode is the utter unwillingness of the entire establishment to address the proverbial elephant in the room- a culture of political compulsions, regulatory oversight, crony capitalism and utter negligence/incompetence which gave rise to this mess in the first place. A somewhat vague form of dissent by a RBI ex-governor and another not-so-vague expression of discontent by another ex-deputy governor will do little to bring about the much needed shakeup in our entire banking system.
Many may blame the current situation of debt overhang and poor health of the banking system on the expansionist lending policies which were followed to prop up growth following the global economic meltdown of 2008. However, this is too simplistic an explanation and may at best be termed as a “convenient explanation”. The rot in our banking system, especially our nationalized banks, runs much deeper than this.
It is indeed ironical that the very act of bank nationalization which was supposed to protect depositor’s money and promote lending to priority sectors has become an albatross around the neck of our tax payers who (even more ironically) are the bank depositors as well. Repeated rounds of bank recapitalisation with absolutely zero accountability fundamentally implies that bank depositors are being asked to again recapitalize the bank with their tax money. So we end up paying more money to secure the principal amount deposited with the bank.
There are mainly two parts to this story – the first one being of political compulsions and the second one being of crony capitalism aided by a complicit system. The common feature of course is regulatory oversight and when the regulator does get its act together, it faces defeat because it lacks the independence and autonomy to implement its mandate.
Convenient as it may be to put the entire blame on COVID, the grim reality is that the banking system was teetering on the brink of collapse even before the pandemic set in. The crisis brought about by the ILFS, DHFL, Yes Bank and PMC scams have only served to hasten the end of a system which had been rendered weak and impotent by years of mismanagement, collusion and oversight. Easy liquidity may bring about growth but at the end of the day it is at best steroid induced growth. It is one thing to provide a growth stimulus and it is another thing to disburse loans without bothering to check the veracity and the feasibility of sales and profit projections & assessment of generateoverall project viability.
It is often said that one can be wise in hindsight but then such cycles of easy liquidity followed by burgeoning NPAs have repeated themselves with monotonous regularity. Bankers at least could have learnt from the mistakes of the previous cycle and the question of hindsight would not have arisen in the first place. Either there were political compulsions or there was an element of collusion with conniving promoters which probably rendered such learning futile, even if it was there in place.
Priority sector lending is another name for the largesse which all political parties choose to dispense before every election. Agriculture contributes to around 14% of the GDP but engages 42% of the population. It is a no brainer that repeated rounds of farm loan waiver will not serve to put this sector back on its feet. The only solution lies in creating opportunities outside agriculture and the mere creation of a trillion rupee rural infrastructure fund and changing the legal framework for marketing of agricultural products will not be enough. The devil lies in the execution and ensuring that the benefit is passed on to the desired recipient.
Coming to the current crisis, RBI has done more than enough to ensure liquidity. The challenge of course is to ensure that the liquidity goes towards promoting real business growth and does not become an excuse for compounding the bad loan problem. The government may want an expansionist monetary policy but the RBI will need to stand its ground when it comes to observing adherence to prudential norms. Further, credit guarantee schemes should not result in relaxation in the norms for assessing the repayment capacity of the borrower.
Differentiating between COVID induced stress and incipient pre-COVID stress is important and a simple threshold of “maximum 30 days overdue as on March 1, 2020” may not be enough. Hopefully the Expert Committee will be able to come up with a set of strict but pragmatic norms so that debt-restructuring requests do not become the order of the day and one is able to distinguish between genuine cases and the rotten apples.
Systemically, it is important to now usher in a few changes.
To begin with, legislative change to ensure greater autonomy for the RBI is the need of the hour.
Secondly, privatization of nationalized banks is the need of the hour so that the tax payer’s money is not sucked into the cesspool of NPA provisioning and subsequent recapitalization. A mere merger of smaller and weaker banks with the larger ones is not exactly the antidote that we are looking for. Privatization will at least enable these banks to follow prudential banking norms, recruit the best talent and buy them freedom from political directives (which eventually result in huge write-offs).
Thirdly, a much stricter and more evolved regulatory framework is required so that the likes of Yes Bank, PMC & ILFS do not happen again and once and for all, we can bid goodbye to the era of crony capitalism and unscrupulous promoters.
Fourthly, debt fuelled growth works only if it results in creation of such assets which are able to generate adequate returns. Project appraisal techniques need a major revamp to facilitate the same.
Last but not the least, a significant portion of the debt has clearly become unserviceable and further restricting will only prolong the agony. Procrastination will not save the day and the time has come to bite the bullet in terms of write-offs and provisioning.