'Every few days, I wake up with a sense of restlessness that time is running out'...
'We have created a due process for stressed assets to resolve, but there is no concrete plan in place for public sector bank balance sheets,' says RBI Deputy Governor Viral Acharya.
Illustration: Uttam Ghosh/Rediff.com
The promulgation of the Banking Regulation (Amendment) Ordinance, 2017 (since notified as an Act), and the subsequent actions taken thereunder, have made the Insolvency and Bankruptcy Code (IBC) a lynchpin of the new resolution framework.
There were legitimate concerns that if the Reserve Bank of India directs banks to file accounts under the IBC, it would enter the tricky domain of commercial judgments on specific cases.
However, the approach recommended by the Internal Advisory Committee (IAC) constituted by the RBI for this purpose has been objective and has allayed these misgivings.
The IAC recommended that the RBI initially focus on stressed assets, which are large, material and aged, in that they have eluded a viable resolution plan despite being classified as NPAs for a significant amount of time.
Accordingly, the RBI directed banks to file insolvency applications against 12 large accounts comprising about 25 per cent of the total NPAs.
The RBI has now advised banks to resolve some of the other accounts by December 2017; if banks fail to put in place a viable resolution plan within the timelines, these cases also will be referred for resolution under the IBC.
The RBI has also advised banks to make higher provisions for these accounts to be referred under the IBC.
This is intended to improve bank provision coverage ratios and to ensure that banks are fully protected against likely losses in the resolution process.
The higher regulatory minimum provisions should enable banks to focus on what the borrowing company requires to turn around rather than on narrowly minimising their own balance sheet impacts. This should also help transition to higher and more countercyclical provisioning norms in due course.
The RBI hopes that banks utilise the IBC extensively and file for insolvency proceedings on their own without waiting for regulatory directions.
Ideally, in line with international best practice, out-of-court restructuring may be the right medicine at 'pre-default' stage, as soon as the first signs of incipient stress are evident or when covenants in bank loans are tripped by the borrowers.
Once a default happens, the IBC allows for filing of insolvency proceedings, time-bound restructuring, and failing that, liquidation.
This would provide the sanctity that the payment 'due date' deserves and improve credit discipline all around, from bank supply as well as borrower demand standpoints, as borrowers might lose control in the IBC to competing bidders.
Whither are we headed on restoring public sector bank health?
So far so good. A whole ecosystem is evolving around the IBC and the RBI steps have contributed to this structural reform.
I smile and rest peacefully at night with this thought... But every few days, I wake up with a sense of restlessness that time is running out; we have created a due process for stressed assets to resolve, but there is no concrete plan in place for public sector bank balance sheets; how will they withstand the losses during resolution and yet have enough capital buffers to intermediate well the huge proportion of the economy's savings that they receive as deposits.
Can we end the Indian story differently from that of Japan and Europe?
The Government of India has been infusing capital on a regular basis into public sector banks to enable them to meet regulatory capital requirements and maintain the government stake in the PSBs at a benchmark level.
In 2015, the government announced the Indradhanush plan to revamp public sector banks. As part of that plan, a programme of capitalisation to ensure the public sector banks remain Basel-III compliant was also announced.
However, given the correctly recognised scale of NPAs in the books of public sector banks and the lower internal capital augmentation given their tepid, now almost moribund, credit growth, substantial additional capital infusion is almost surely required. This is necessary even after tapping into other avenues.
The Cabinet Committee on Economic Affairs has recently authorised an Alternative Mechanism to take decision on the divestment in respect of public sector banks through exchange-traded funds or other methods subject to the government retaining 52 per cent stake.
Synergistic mergers may also be part of the broader scheme of things. The Union Cabinet has also authorised an Alternative Mechanism for approving amalgamation of public sector banks.
The framework envisages initiation of merger proposal by the Bank Boards based on commercial considerations, which will be considered for in-principle approval by the Alternative Mechanism.
This could provide an opportunity to strengthen the balance sheets, management and boards of banks and enable capital raising by the amalgamated entity from the market at better valuations in case synergies eventually materialise.
There are several options on the table and they would have to work together to address various constraints. What worries me, however, is the glacial pace at which all this is happening.
- Having embarked on the NPA resolution process, indeed having catalysed the likely haircuts on banks, can we delay the bank resolution process any further?
- Can we articulate a feasible plan to address the massive recapitalisation need of banks and publicly announce this plan to provide clarity to investors and restore confidence in the markets about our banking system?
- Why aren't the bank board approvals of public capital raising leading to immediate equity issuances at a time when liquidity chasing stock markets is plentiful?
- What are the bank chairmen waiting for, the elusive improvement in market-to-book, which will happen only with a better capital structure and could get impaired by further growth shocks to the economy in the meantime?
- Can the government divest its stakes in public sector banks right away to 52 per cent?
- And, for banks whose losses are so large that divestment to 52 per cent won't suffice, how do we tackle the issue?
- Can the valuable and sizeable deposit franchises be sold off to private capital providers so that they can operate as healthy entities rather than be in the intensive care unit under the RBI's Prompt Corrective Action (PCA)?
- Can we start with the relatively smaller banks under PCA as test cases for a decisive overhaul?
I fear time is running out. I worry for the small-scale industries that ( then State Bank of India chairman) R K Talwar cared the most about, which are reliant on relationship-based bank credit.
The Indradhanush was a good plan, but to end the Indian story differently, we need soon a much more powerful plan, a 'Sudarshan Chakra', aimed at swiftly, within months if not weeks, for restoring public sector bank health, in current ownership structure or otherwise.
Edited excerpts from RBI Deputy Governor Dr Viral Acharya's speech, 'The Unfinished Agenda: Restoring Public Sector Bank Health in India', delivered as the 8th R K Talwar Memorial Lecture in Mumbai on September 7, 2017, weeks before the government announced its plans to recapitalise public sector banks.