Empower banks to cut losses and get rid of NPAs without 3C fear

With a view to containing non-performing assets (NPAs) in banks, the government should empower the boards of the public sector banks to deal with the bad assets with the help of a special purpose vehicle which can lay broad guidelines for the lenders to take “haircuts” and cut the losses in the sectors in distress, without fear of 3Cs – CAG, Central Vigilance Commission and CBI, the ASSOCHAM has said.

The twin exercise of empowering the boards of the PSU banks and formation of an SPV, which may be called ‘Asset Revival Bank’ (ARB) should be implemented without further delays, instilling confidence in the bankers to take decisions about restructuring the loans to sectors such as steel, construction, power etc. While the SPV would set the rules of the game, the bank board’s should be given powers to decide on the quantum of the waiver of compounding of interests which has led to some of the bad loans to many times over the principal amount.

“The new institution has been tried in China which has been managing the problem at a much higher scale,” ASSOCHAM Secretary General Mr. D S Rawat said.

He said the ARB should be structured in a manner so it can be kept outside the purview of the 3Cs which, can, otherwise, created, or have rather already created enough fears among professional bankers not to take even routine decisions of sanctioning fresh loans. “So far as taking a call on the NPAs or writing them off or cleaning the balance sheets are concerned, these have become a clear no-no because of the fear of being hounded even after retirement”.

The ASSOCHAM said in a growing economy where the total loan portfolio or the book size of the banks needs to grow, writing off Rs 12,000-14,000 crore bad loan a year should not raise eye-brows and be treated as part of a normal business risks. “This is surely not to suggest to let go wilful defaulters or fraudsters, though much more clarity is needed as to who qualifies to be a wilful defaulter”, the chamber said.

This is essentially what China did when its government-owned banks were saddled with some $400 billion in bad debt during the 2000s.

On account of fear or reprisals, the banks are not prepared to support any company declared NPA. NPAs are untouchables and banks are eager to get rid of them. It is very important that RBI quickly provides a suitable mechanism to revive the industry by incentivizing the Banks to deal with the NPAs in an effective manner.

Businesses which have gone bad due to economic slowdown need hand holding. It could be in term of restructuring loans or interest rate moratorium that will help them sustain the bad phase and once there is uptick they will be able to pay loan back.