The Reserve Bank of India (RBI) logo is displayed outside of the bank’s headquarters. (Photographer: Kainaz Amaria/Bloomberg)

Forced Liquidation Not The Intention Of New RBI Rules, Says Sanjeev Sanyal

Forced liquidation is not the intention of the Reserve Bank of India’s new rules on stressed assets resolution, according to Sanjeev Sanyal, the principal economic adviser of the Government of India. “The intention is to quickly recognise that there is a problem and get to work with the entity to try and resolve it. That part has to be strengthened,” Sanyal told BloombergQuint in an interview.

The 180-day timeline is “reasonable enough time” for lenders to come up with a resolution plan, he said, especially given that the pace of recognition of bad loans have become faster with a central repository of information.

Nevertheless, the system remains flexible and processes need to be smoothed out as the new framework gets tested, Sanyal added.

Here are edited excerpts from the interview.

The consensus view seems to be that the RBI’s new framework was a natural step. With the IBC in place, all the individual schemes were mudding the waters. Is that how you see it?

We had a large number of schemes and processes which were very complicated. So, we have removed a large number of these and replaced them with a generic framework which is a simple, clear framework which everybody can recognise and implement. It is also reasonably flexible. It is clear what we are changing. The earlier set of schemes had overlapping procedures, confusing acronyms. Now we have a system which is generic. It is a framework and more things will be added to it to make it work. But all parties know now what the framework is. We further have IBC process in downstream which has got going. So, the upstream part of recognition of NPAs in the first instance has been given a clear framework.

Banks have been given a very strict timeline of 180 days to come together if everybody agrees on a resolution plan and if not go straight to IBC. Isn’t that a little tough?

We have to see how it goes. We don’t want unintended consequences of these things. But 180 days or 6 months is not a short period of time in which the resolution plan will be put together. One thing happening here is you are also recognising this early on. Earlier the problem was you spent a large amount of time recognising that there was a problem. There was no central repository of knowledge under which everybody got informed that there was a problem emerging in a certain entity. So, that time is reduced. Now, everyone knows that there is an issue really fast. You’re right that we need the banks too to respond quickly and come up with a resolution plan. You are raising a valid issue. Otherwise, everything ends up in the NCLT and it gets clogged. So, the whole process has to be smoothed out. 180 days have been put in place for the time being and the judgement is it is a reasonable enough time to come up with a resolution plan. You don’t have to implement all of it [within that time]. Just merely come up with one.

Do you think the next logical step would be to make default public knowledge?

I wouldn’t presume to announce a next step. This is what it is, as it stands. We will see what happens as a result of it, take feedback and adjust it along the way.

On the issue of implications, one impression is you will see the reported NPA number rise closer to the overall stressed asset numbers. The other understanding is provisions will rise even if the first scenario doesn’t play out. Is that a fair assessment?

Let’s see how it goes. We have recognised a large number of NPAs over the last one year or two and various resolution processes have been put in place. There may be a one time increase since the recognition process is now being sped up and made more transparent. But things will settle down. It is a much fair, cleaner system and we will see how it plays out and make adjustments when necessary. But this is a transparent system. It’s not like as soon as you recognise there is a problem you suddenly send them straight to liquidation. There is a 180-day process, then there are 15 days further for putting it in NCLT. Another 180 days to come up with a resolution, 30-day extension and so on. So, there is a long way till some forced resolution happens. Along the way many forms of recovery and resolution can be attempted, and that is the part which needs to be strengthened.

What would be the extent of liquidation with a large number of cases going into IBC and the implications for jobs and economy. Do you see that as a risk?

We have already gone through that process last year, where a large number of cases, accounting for nearly two-third of NPAs were identified by the RBI. First, there were 12 cases and then another 40 cases were added to that list. These kind of efforts may cause something like a one-time adjustment for making our system more modernised and responsive. As the information evolves, the financial system will be able to quickly respond to it. In some cases, there may be liquidation. But that is not the intention of the new framework. The intention is to quickly recognise that there is a problem and get to work with the entity to try and resolve it. That part has to be strengthened. Everything doesn’t have to turn up in the IBC.

Is it flowing as quickly as you thought or are there some challenges in the large cases which may delay the timeline?

It was a brand new system. So, in some ways we had to learn along the way. I think the NCLT has worked reasonably well. Even before we see the end point of that process, we have seen a major culture change in the corporate sector and the banking sector. The banks have now become much more serious about recognising and providing for NPAs. You have seen a clear recognition in the corporate sector that eternal evergreening is not something that they can expect. Resolution of some sort will have to to be carried out. You have seen many promoters getting rid of various inefficient investments.

Overall, when all of this is happening, it made the economy efficient. It also means that going forward, when investment is made, more thought will be given over the amount of capital being deployed and why it is being deployed as this capital will have other uses as well. So, if an inefficient user preempts it, it means that other investments were not made. Cleaning this up was very important. During the transition, some pain does get inflicted on the economy. We saw that in 2017, but the economy has recovered from it. You can see the IIP numbers beginning to come back and so on. We have gone through the transition and we have more than survived it. By the end of the process, we will have a much healthier banking system.

Do you think we are risking a scenario where people don’t want to lend to large investment projects?

There is always a risk that you will swing from one extreme to the other. That is part of economic management. It is not about the framework but managing transition, expectations, work culture. So, it is an ongoing thing, it needs to be monitored and adjusted to. There is no quick formula to this. It’s a risk that exists, we are aware of it and we have to manage it.

When do you think we will recover from this, in terms of lifting the investments-to-GDP ratio up?

I am no longer in the business of forecasting. The recent number has suggested that the economy is recovering. The global economy is also recovering, which is a good thing as exports and other things will also hopefully pick up with it. As the economy adjusts to this new ecosystem of GST, IBC and so on, we will now begin growing with the new paradigm in place. The transition from the earlier paradigm to this one obviously led to friction in the system. But I think we are now in the new paradigm and we have to make this one work.

Do we not run the risk of pushing hard on one segment like SMEs?

The clean-up of banks have disproportionately hurt the segment for a very simple reason, that this segment relies almost entirely on the banking system as they don’t have access to capital markets as larger players do. So, we need to handhold them a little bit. The same thing happened with GST. Unlike the large players, they are not in a position to hire lawyers or accountants. So, some of them did have difficulties. We recognise this, and we do need to handhold them a little bit. In the end, SMEs are a source of resilience to the economy, resource of jobs, innovation and so on. So, it is not unfair that we put some special efforts looking at their needs.

Watch the full interview here.