Finance Ministry Mulls Oversight Committees For Resolution Of Bad Loans

The government is considering constituting ‘oversight committees’ to help speed up the resolution of bad loans, the Ministry of Finance said in a press release detailing opening remarks made by the Finance Minister at a meeting of the Consultative Committee on Finance and Corporate Affairs. The panel met on Wednesday to discuss ways to resolve bad loans.

“…RBI has also made an Oversight Committee to look into process of the cases referred to it by the different banks. Seeing the response and its performance, the Finance Minister Shri Jaitley said that the Government is considering multiplication of such committees,” the release said.

The RBI had set up an “overseeing committee” headed by former chief vigilance commissioner Pradeep Kumar under the Scheme for Sustainable Structuring of Stressed Assets(S4A). The three-member committee was tasked with ensuring that loan restructuring under the scheme was done in a transparent manner and each deal had to be cleared by it before implementation. This also helped give bankers comfort in taking tough decisions such as large haircuts on bad loans. Under S4A, a bank can split a company’s debt into a sustainable and unsustainable part. The unsustainable part can be converted into equity or equity-linked instruments provided atleast half of the debt is sustainable and can be serviced with existing cash flows.

Apart from considering the setting up of oversight committees, the government has also not ruled out the setting up of a bad-bank like structure. “On the issue of setting-up a ‘bad bank’, the Union Minister of Finance said that several possible alternatives exist and the issue is being debated on public platforms,” said the ministry in its press release. Some members supported this and said that only those loans which can’t be resolved through sector specific measures should be transferred to the bad bank.

The ministry also detailed suggestions made by the members of the Consultative Committee to resolve the bad loan mess. One such suggestion was to allow state governments to take part in the auction of stressed assets. Another member of the committee was quoted as saying that the government should closely monitor the operations of asset reconstruction companies.

Another suggestion was to avoid classifying restructured loans as bad loans. It was also suggested that apart from recovery proceedings, criminal action must be initiated against large wilful defaulters and their photographs may also be published.

Pace Of Bad Loan Addition Slowing

While a solution still needs to be found for the large stock of bad loans, the pace at which new loans are turning bad has slowed, Jaitley was quoted as saying in the same press release.

“…The core problem of NPAs is with very large corporates, though few in numbers, predominantly in the steel, power, infrastructure and textile sectors,” Jaitley said.

He said that the government is taking sector-specific measures to tackle bad loans, especially to resolve large debts. Jaitley cited the case of the steel industry where the introduction of a minimum import price helped improve the financials of companies in the sector. Similarly, many decisions have been taken in the infrastructure, power and textile sectors to resolve their problems, the minister was quoted as saying.