RBI getting tough on loan defaulters
MUMBAI: The Reserve Bank of India is proposing its toughest measures yet to recover loans from defaulters by prescribing December deadline for the loan restructuring of top 50 defaulters in a way that the assets turn viable and also in an environment where vigilance departments do not stifle the right economic outcome.
Picking up from where former governor Raghuram Rajan left, Deputy Governor Acharya proposed setting up of two asset management companies, one private and the other quasi with government stake holding, and two rating agencies backing for valuation of stressed assets.
The rate of bad loans have come to such an alarming level that banks should be shown some `tough love’ by barring those non-performers from taking deposits and lending. In some cases, merger of banks should also be considered to reduce dependence on government capital.
``This situation should be a cause for concern to all of us,’’ Deputy Governor Acharya told an audience at a conference organised by the Indian Banks Association. ``It is reminiscent of weak banks and stagnating growth witnessed by Japan in the 1990s, with repercussions to date, and by Italy since 2010. Japan has experienced, and Italy, is in my opinion experiencing, a lost decade. I believe we are at crossroads and have an important choice to make.’’
Acharya, the former New York University Professor who has studied the mess created at the US mortgage lenders Fannie Mae and Freddie Mac which were at the epicenter of the 2008 credit crisis, has been an advocate of prudent practices and a quick clean-up of bad loans mess. He has been an advocate of bad bank, but has since abandoned the phrase since it conveys a different message, though the idea remains.
``I have previously used the phrase “bad bank” for such ideas, over time I have come to dislike the title,’’ he said. ``A `bad bank’ conveys the impression that this entity is to operate as a bank but has bad assets to start with. In fact, the idea is not to operate these entities as banks at all. Resolution agencies set up as banks that originate or guarantee lending have ended up being future reckless lenders.’’
But the banking industry which has been struggling appears to waiting for some of the words to translate into action at the regulatory as well as the government level.
``Many bits and pieces of this had been recommended. Maybe not in the framework in which it was given, but many of this had already been recommended by the banks,'' said Arundhati Bhattacharya, chairman, State Bank of India.
``Certain things are definitely new. For instance getting a credit rating of the restructured asset is new, so also regarding the capitalisation... so definitely these are under consideration, but how seriously, or what is the government's thought on all of this, I have no idea.''
Instead, to solve the distressed loans problem in India which is estimated to be reaching as high as 20 percent of the total loans, two separate asset management companies could be set up, Acharya suggested. A Private Asset Management Company which will have assets where the stress is such that they are likely to have economic value in the short run with moderate levels of debt forgiveness. These could be from sector such as metals, telecom and textiles.
The second one could be National Asset Management Company with minority government holding. These could be in assets where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short to medium term.
But almost all of these could work only if the pricing of asset is correct and that banks are provided a cover from the vigilance officials which have created a fear of witch-hunt.
``Haircuts taken by banks under a feasible plan would be required by government ruling as being acceptable by the vigilance authorities,’’ Acharya said.
Picking up from where former governor Raghuram Rajan left, Deputy Governor Acharya proposed setting up of two asset management companies, one private and the other quasi with government stake holding, and two rating agencies backing for valuation of stressed assets.
The rate of bad loans have come to such an alarming level that banks should be shown some `tough love’ by barring those non-performers from taking deposits and lending. In some cases, merger of banks should also be considered to reduce dependence on government capital.
``This situation should be a cause for concern to all of us,’’ Deputy Governor Acharya told an audience at a conference organised by the Indian Banks Association. ``It is reminiscent of weak banks and stagnating growth witnessed by Japan in the 1990s, with repercussions to date, and by Italy since 2010. Japan has experienced, and Italy, is in my opinion experiencing, a lost decade. I believe we are at crossroads and have an important choice to make.’’
Acharya, the former New York University Professor who has studied the mess created at the US mortgage lenders Fannie Mae and Freddie Mac which were at the epicenter of the 2008 credit crisis, has been an advocate of prudent practices and a quick clean-up of bad loans mess. He has been an advocate of bad bank, but has since abandoned the phrase since it conveys a different message, though the idea remains.
``I have previously used the phrase “bad bank” for such ideas, over time I have come to dislike the title,’’ he said. ``A `bad bank’ conveys the impression that this entity is to operate as a bank but has bad assets to start with. In fact, the idea is not to operate these entities as banks at all. Resolution agencies set up as banks that originate or guarantee lending have ended up being future reckless lenders.’’
But the banking industry which has been struggling appears to waiting for some of the words to translate into action at the regulatory as well as the government level.
``Many bits and pieces of this had been recommended. Maybe not in the framework in which it was given, but many of this had already been recommended by the banks,'' said Arundhati Bhattacharya, chairman, State Bank of India.
``Certain things are definitely new. For instance getting a credit rating of the restructured asset is new, so also regarding the capitalisation... so definitely these are under consideration, but how seriously, or what is the government's thought on all of this, I have no idea.''
Instead, to solve the distressed loans problem in India which is estimated to be reaching as high as 20 percent of the total loans, two separate asset management companies could be set up, Acharya suggested. A Private Asset Management Company which will have assets where the stress is such that they are likely to have economic value in the short run with moderate levels of debt forgiveness. These could be from sector such as metals, telecom and textiles.
The second one could be National Asset Management Company with minority government holding. These could be in assets where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short to medium term.
But almost all of these could work only if the pricing of asset is correct and that banks are provided a cover from the vigilance officials which have created a fear of witch-hunt.
``Haircuts taken by banks under a feasible plan would be required by government ruling as being acceptable by the vigilance authorities,’’ Acharya said.
