The biggest crisis the banking ecosystem & primarily the public sector ones are facing today is NPA and it is primarily concentrated in some 10-20 key corporate accounts. Lot of noises and now even an ordinance has been pushed through to resolve it but no resolutions in sight. So what are the options? Two steps, first is to resolve the immediate challenge and next is to ensure we don’t reach such a stage again!
Resolving the immediate NPA crisis. Options?
- Reach one time agreement with these accounts (whoever is willing to!) and close the issue as ‘one time mega cleaning’. Need to be done at a JLF level (joint lenders forum) for multi bank/ consortium accounts
- Create pressure on these select accounts to arrive at a serious plan to regularize. This will need strong political backing and would not get done by individual banks. Will need coercive steps in a cohesive manner across bank, RBI & Ministry of Finance
- Sell of the stressed assets to ARC at right price (and this is the reason that there deals with ARC are not happening at a large scale and also appetite of such private run ARCs can also be a concern). Or else, GOI can promulgate a special purpose vehicle e.g. Bad Bank for one time taking over such assets (Read our article on Bad Bank to get the perspectives). But as of now there does not seem to be any traction for bad bank, unless off-course reasoning changes with more deterioration of the loan portfolios
- For willful defaulters/ potential fraud, immediately invoke the insolvency act.
- On a slightly longer timeframe, the economy has to show some strong positive signals. Some sector specific actions will be required as well to prop them up (e.g. what GOI promulgated a few days earlier for Steel industry: use domestic products for all government projects). An improving economy can improve the cash flow and that in turn can give some breather to the industry to better finance their debts, especially for the genuinely distressed defaulters. Some major investments in infrastructure by central government can do some good!
Long term corrective plans. Options?
- Create a database of the same in line of ‘no fly list’ of airlines for repeat/ high value corporate defaulters so that they find it difficult to get formal credit next time. Instead of a pure ‘no fly’, there can a graded list with grade specific actions/ directions for lenders. This can be based on historical data of RBI ‘CRILC’ (Central Repository of Information on Large Credits (CRILC))
- The concentration of the NPA mostly with PSB indicates major compromises on ‘good banking practices’. This will need 3 corrections. Penalize the key stakeholders/ leaders in these banks and send a strong signal that this can not continue, secondly complete relook at the corporate credit process to plug the current loopholes and thirdly leverage technology such as blockchain etc to bring in more cohesiveness within the banking community in identifying potential fraud & willful defaulters
- More power to banks for faster recovery. Lack of the same can be one of the reason that banks currently end up ‘ever greening of the loans’. The new banking ordinance is in right step but that can work only if the Insolvency & Bankruptcy Act of 2016 proves to be as effective as it promises to be.
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