Banks must find a way to handle debt without inconveniencing customers

Stand-in finance minister Piyush Goyal’s decision to explore more options to resolve the vexed issue of stressed assets in banks is a welcome move. The appointment of insolvency professionals and shifting 20 top companies to the National Company Law Tribunal (NCLT) has happened over the last one year. While NCLT-IPs combo mechanism under the Insolvency and Bankruptcy Code (IBC) is work in progress, the central government will have to weigh different ways of resolving non-performing assets that touched the Rs 10.30 lakh crore mark and accounted for 11.2 per cent of advances till March 2018.

The panel headed by Punjab National Bank executive chairman Sunil Mehta set up by Goyal will have to provide the roadmap in two weeks. Fresh ideas will only help the finance minister expedite the task of cleaning up bank balance sheets and hasten corporate debt financing as well as domestic loans. The Reserve Bank of India (RBI) had made defaults by even one day as non-performing assets. While some banks have contested the onerous norms, the RBI had defended its move with the contention that its new guidelines were ‘result oriented and flexible’.

The norms outlined on February are intended to bring about a behavioural change in the way companies handle debt without trying to inconvenience genuine bank customers. The RBI has continued with the 30-day trigger in case of cash credits. Regarding term loans, adequate notice period has been allowed for scheduled repayments. Banks may also have to comply with the RBI advisory that going all out for retail loans and individuals borrowing may not be the way out of huge defaults reported from the corporate sector.

In this backdrop, the Sunil Mehta panel has its task cut out to come up with fresh strategies to tackle not only the old NPAs but also fresh build-up reported by different banks and financial institutions. The swiftness with which these issues are resolved is the key. Secondly, strategies to prevent fresh build-up of stressed loans are yet another area the Mehta committee can work on. The Joint Lenders Forum (JLF) recommendations and State Bank of India (SBI) practices may lend fresh perspective to resolving NPAs.

For instance, setting up independent oversight committees with former bankers and vigilance officials to scrutinise the loans cleared by SBI could be a way out. Perhaps other banks can try out this mechanism. RBI deputy governor Viral Acharya’s suggestion to set up an online platform to sell stressed assets as in the US can be given a fresh life. Similarly, this year’s economic survey recommendation of setting up a bad bank to handle all stressed assets involving multiple lenders should be fleshed out.

The third possible idea that can be considered by the Mehta committee was to set up a national asset management company (NAMC) and Private Assets Management Company (PAMC) to deal with stressed assets of state-run and private sector banks respectively. The fourth proposal flagged at last Friday’s meeting of public sector banks chairmen with Goyal was to constitute an asset reconstruction company (ARC).

ARC’s concept is not new. During the tenure of the Atal Bihari Vajpayee’s NDA government, the idea of an ARC with stake holding by different banks was mooted. Goyal will have to take on board the experience and outcome of the 2002 mechanism that was put in place.

Already, 24 asset reconstruction companies floated by state-run and private lenders are in operation. There is no publicly available analysis of the asset reconstruction companies’ performance. But, ARCs seem to have turned around very few viable companies though firms with assets worth over Rs 4,00,000 crore were considered. Goyal will have to carefully consider his options before he moves further.