Government ‘Marching In Step’ With RBI On Bad Loans, Says Sanjeev Sanyal
North Block in New Delhi, Which Houses the Finance Ministry. (Photographer: Prashanth Vishwanathan/Bloomberg)

Government ‘Marching In Step’ With RBI On Bad Loans, Says Sanjeev Sanyal

The government and the Reserve Bank of India (RBI) are working together to resolve the pile of bad loans on books of Indian banks, and the decision to refer 12 of the largest accounts to the Bankruptcy Court is part of that process, said Sanjeev Sanyal, principal economic adviser to the government.

In an interview with BloombergQuint, Sanyal said that the regulator’s intervention in bad loan resolution is a one-off and suggested that the RBI would step back from the process once the top 40-50 bad loan accounts are tackled. If banks require additional capital to get through this regulator-driven bad loan clean-up, the government has tools using which this capital can be provided, Sanyal added.

On Tuesday, the RBI said that it would direct banks to refer 12 bad loan accounts, which make up 25 percent of the gross non performing assets of the system, for resolution under the Insolvency and Bankruptcy Code (IBC). The directive followed an amendment to the Banking Regulation Act in May, which allowed the regulator to intervene directly in bad loan resolution.

We are working together with the Reserve Bank of India. As you may have seen, this follows from the ordinance that was put out a few weeks ago. So you can see we are marching in step with the Reserve Bank. It is very much a coordinated approach.
Sanjeev Sanyal, Principal Economic Adviser, Government of India

According to Sanyal, while a lot of different solutions have been tried out to find a resolution to the problem of bad loans, none have worked. In light of this, the government and the RBI decided that it is best to tackle the largest 40-50 accounts directly, since they account for a large chunk of the NPAs.

Indian banks had gross bad loans adding up to Rs 7.7 lakh crore as of March 2017. The total stressed assets, which include restructured loans, are now close to 17 percent of all loans, according to a report by rating agency Moody’s last week.

This NPA problem has been festering for many years and has been growing. But many attempts were also made to try and resolve it. Unfortunately what has happened is that these earlier attempts didn’t work. What we ultimately decided was that we will take advantage of a peculiar feature of this round of bad loans which is that the problem is very concentrated. Something like 40-50 cases across 6-7 sectors account for the bulk of these bad loans. So the idea then was that since this is the case, for this lot, we can take a customised approach.
Sanjeev Sanyal, Principal Economic Adviser, Government of India

Apart from the 12 accounts which have already been referred for resolution under the IBC, it is likely that a large proportion of the remaining bad loan accounts will also go down the same route. Bankers, however, are sceptical on whether the newly-constituted insolvency and bankruptcy process will be able to handle such an influx of large cases.

Responding to that concern, Sanyal noted that the insolvency framework is being built up. “Good (insolvency) professionals are there. Maybe not in the numbers we want. But they are there. We do understand the pitfalls so we will deal with them as they come,” said Sanyal.

Where Will The Capital Come From?

The other key challenge in resolving bad loan accounts is that of capital. The government had set aside Rs 70,000 crore for infusion into banks over a four year period ending fiscal 2019. As part of that plan, an infusion of Rs 10,000 crore has been planned for the current fiscal.

Most analysts, however, peg the capital requirement for banks at a much higher amount. According to Sanyal, the government first needs to get a ‘fix’ on the amount of capital needed.

First we need to get a fix on the number. So far it is an opinion. Only when we start to resolve will you have a hard number on what the number really is. As this process gets done, we will get a fix on the number. Out of whatever that number is, it is not like the whole asset is worth nothing. Some of these assets have fairly large residual values. So ultimately what you have to worry about is the amount left over after you have residual value plus the provisioning. Then you have an amount that has to be dealt with. 
Sanjeev Sanyal, Principal Economic Adviser, Government of India

Once that amount becomes clearer, the government has various tools available to infuse capital. This could include some amount of capital being provided from the government’s budget. Other ways to release capital such as reducing government stake in banks where the shareholding is high could also be considered, said Sanyal.

While the government has maintained that more capital would be provided if needed, it has so far not committed to infusing additional funds from its own budget. The constraint there remains the government’s targeted fiscal deficit of 3.2 percent for the current year.

This (capital requirement) can be dealt with in various ways. Some may come through the budget. You could also pare down the government’s holdings because in many banks the holding is very high. You could create recapitalisation bonds. Every tool available will be used.
Sanjeev Sanyal, Principal Economic Adviser, Government of India

Should The Regulator Be Involved In Bad Loan Resolution?

On the more conceptual concern around whether a regulator should be directly involved in taking commercial decisions, Sanyal said that this step has been taken only for the top 40-50 accounts. “This is not the normal process. This is being done to get the banking system, which is getting jammed up, to get liquid and to get going.”

Sanyal added that the new arrangement is also not intended to return the system to a period of directed lending. The oversight committees are not going to tell banks what to do, he said while adding that this panel will essentially ensure that a proper process is followed and that banks implement an agreed solution. The oversight committee is determining what the exact resolution is, said Sanyal.

When this lot of 50 accounts is done, by and large this process will be unwound. Maybe at some future date it will be revived again but for this round, this is it.
Sanjeev Sanyal, Principal Economic Adviser, Government of India
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