Raghuram Rajan: The bad loan resolution process should reach a logical end

By Ravi Krishnan, 2017-09-06 07:41:08

Chennai: An ecosystem for resolving non-performing assets (NPAs) is now in place with the passage of the Insolvency and Bankruptcy Code (IBC), the absence of which had impeded the ability of the Reserve Bank of India (RBI) to tackle the problem, former RBI governor Raghuram Rajan said in an interview. Rajan, who has just published his book, I Do What I Do, said it’s important to make sure that the resolution process reaches a logical conclusion so that “it doesn’t become an endless circle of appeals”. He also said government capital support is crucial for state-owned banks even if it means trimming allocations to other areas. Edited excerpts:

In your book you have written that despite the best and the brightest in RBI addressing the distressed assets situation, it was one area in which you couldn’t make much progress. How do you see the current strategy of dealing with NPAs differing from the steps you had taken?

I think what we had missing was a Bankruptcy Code because any kind of restructuring happens with the ultimate threat that if it doesn’t happen in an appropriate way, the Bankruptcy Code will be invoked. So I think what is really good about the current situation is we have a Bankruptcy Code in place. We have to make sure that the functioning of the NCLT (National Company Law Tribunal) and so on is unhampered, and that it goes to its logical conclusion and the number of appeals to that process is limited so that it doesn’t become an endless circle of appeals. But if we can show some success there, then the Bankruptcy Code acts as a shadow to the processes that we structure so that everybody knows they have to work together quickly so as to resolve the situation; otherwise, it goes into the Bankruptcy Code.

One of the remaining problems is still the ability of bankers to make appropriate decisions. They are scared of writing off loans for fear that there will be an investigation later. That issue we have to tackle. I understand that this anti-corruption bill that the government has may deal with some of that. It shouldn’t be that any consideration of loss, if the loss is taken for a longer-term benefit, is seen as a corrupt practice.

You said the NPA measures you took were also kind of an out-of-court bankruptcy law when taken in totality. But would you have done things differently if the Bankruptcy Code had already been there?

Of course. But ultimately, the out-of-court bankruptcy gets its teeth from the existence of the bankruptcy law. So it’s—if you don’t co-operate, we will go there (to NCLT), and that’s worse for you. Ultimately, that’s always how it works.

One of the criticisms about the set of measures that RBI had come out with in those three years is there was an emphasis on recognition of the problem; but when it came to resolution, RBI effectively kicked the can down the road.

Well, we were trying to not kick the can down the road but also give the bankers teeth. For example, this mechanism by which they could ease out the promoter, the SDR (strategic debt restructuring)—some of those were an attempt to give them some teeth. Remember, where we started, there was very little teeth and they (bad loans) could be held up forever and the promoter need never pay. So we wanted ways for them to (tackle) the promoter in the absence of the Bankruptcy Code. Of course, this process has taken long enough that we have actually enacted the Code and the NCLT’s functioning. And it will be important to make sure that it functions well. And then you have both possibilities, either do an out-of-court re-structuring through the RBI process or, if that doesn’t work, move under the Bankruptcy Code.

Now that RBI has directly intervened in bad loan cases after the Banking Act amendment, do you feel there’s a conflict of interest?

I think there is definitely a conflict of interest whenever RBI is being asked to essentially determine the fate of specific loans. It can determine how they are accounted for, it can say you have to treat this as an NPA but in terms of specific resolution, the further it stays away from the specific resolution, the better. I don’t think so far it has actually required a specific resolution. Instead it has said these (set of loans) are long overdue, you should sort of refer them to NCLT. But it hasn’t said this is how you should treat them. If it gets into that sort of micro-management, then I think there is a legitimate question to be asked how much should RBI intervene in specific resolution.

In the book you have written that the true yardstick of progress for increasing public sector banks’ competitiveness is if the DFS (department of financial services) shuts down and management passes on to the boards of banks and the banks board bureau. But the banks board bureau has been a kind of disappointment, hasn’t it?

I think you can speculate as to why. The logic behind the banks board bureau is something that has worked reasonably in other countries; so if there is unhappiness about how much it has done, we must go into details and ask why hasn’t it done as much as it could. Ultimately, I think the message from different Gyan Sangams (bankers’ gatherings) is—each bank shouldn’t be doing the same thing. I remember at one Gyan Sangam, there was a statement that if you go into a PSU (public sector undertaking) bank, you don’t know which one it is because they all look the same. So, given that, if we want variety, if we want to make sure that they all don’t do the same thing and make the same mistakes, it is important that they be managed differently, and that means there should be no common point of management and that is where the statement on DFS came in. DFS, unfortunately, turns out to be the common point of management. And we should de-centralize those decisions ultimately back to the boards. And government has its representatives on the boards. Let them participate in the decision-making rather than decisions coming from high (places).

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Source: Livemint.com

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