Independent CDR advisory panel is a bad idea
With the amount of loans restructured by banks through the CDR cell rising to R76,479 crore in FY13 from R6,615 crore in FY11, taking the total of NPAs and restructured loans to an estimated 10% of total bank credit at the end of FY13, it is not surprising the authorities are a worried lot. RBI set the ball rolling by, on May 30, announcing the implementation of the new Mahapatra committee guidelines which require banks to increase the provisioning on restructured loans to 5% from the current 2% level among a host of other measures. It is in this context that financial services secretary Rajiv Takru has come down hard on banks while accusing them of being soft on defaulters and even suggesting they take the easy way out by restructuring loans—in the event, he has suggested an independent advisory panel to help banks on large restructuring, both at the consortium level as well as as the bilateral level between borrowers and individual banks.
While an independent perspective is generally a good thing, it is difficult to see how this bunch of wise men and women will do much better than the galaxy of independent directors that have adorned the boards of both PSU and private firms while contributing little. Companies, and banks are no exception, are run by managements and the roles of boards can at best be directional. If the argument is that banks lack the perspective required to assess loans—if the macro economy is doing badly, should loans be given to ambitiously bid projects, for instance—then this is what needs to be beefed up with, if need be, better distance-to-default models. If there is a difference, as there is, between the NPAs/restructured loans of private and public sector banks, a large part is surely attributable to political interference. In the case of agriculture loans and their subsequent waivers, for instance, banks have had little choice in the matter. Ditto for loans to unbankable state electricity boards where, after having been arm-twisted into giving loans, banks are being given no choice but to renegotiate the loans with a moratorium on repayments of the principal which has been decided for them.
The larger point is that if banks are restructuring loans in a big way, it is because the choice before them is to lose all the money immediately. Debt recovery tribunals and the Sarfesai Act were brought in as game-changers to help banks recover their loans quickly—in FY12, however, under 17% of the amount referred to DRTs was recovered by banks, and the figure was under 30% in the case of Sarfesai. What the finance ministry needs to do, if it wants to reduce restructuring, is to identify the bottlenecks in the process and then work at eliminating them. Similarly, if RBI feels banks need more skin in the game to prevent them from using restructuring as the first resort, it must revisit the Mahapatra norms at the earliest.