On Monday, via a late evening SOS to bankers and borrowers, RBI Governor Dr Urjit Patel knocked out over half-a-dozen norms meant to resolve stressed assets. Patel is aware that more of the same wasn’t an option and the sector needed radical measures to tame the wild NPA beast. Thus came the Insolvency and Bankruptcy Code (IBC), but as this column has previously noted, the IBC on its own doesn’t prevent the NPA rot from repeating. The revised framework plugs the loophole, with one key message: If loans go kaput, either mend it or end it.
The ‘extend and pretend’ tools cease to exist and banks have to report loan defaults every week, which critics argue is preachy. But as per RBI data, over 86 per cent of all bad loans comprise borrowers with an aggregate exposure of Rs 5 crore and above and little wonder Big Brother wants a close watch.
The time-bound resolution (180 days) seems restrictive, but it’s pertinent to note that insolvency doesn’t always imply liquidation. As the thinking goes, the fear of liquidation resulting in larger losses will ensure that the creditors put in extra effort while lending and resolving defaults. For promoters, there are two rules: One, don’t over-borrow. Two, follow the first rule.
Absence of credit discipline, right from appraisal to the sanction stage, led to years of reckless lending, popularising the narrative: If you owe the bank $100, that’s your problem; if you owe $100 million, that’s the bank’s problem. The RBI wants to change this, but first it has to fix gray areas. For instance, to address the asymmetry of NPA disclosures, the RBI mandates banks to dutifully report divergences, but doesn’t penalise them for erroneous reporting, wilful or otherwise.
Cleaner balance sheets alone are not enough; the regulation should match international standards if we are to privatise state-run banks. As Patel once said, there are costs to be borne, but as long as the endgame is a desirable goal, the pain should be worth it.