Borrowing money

Bank Bailout – Make It Transparent

Bank Bailout – Make It Transparent

Uttam gupta

The government’s proposed bad bank program is just an attempt to use taxpayers’ money to bail out banks affected by NPA

In the Union budget for 2021-2022, the Minister of Finance Nirmala Sitharaman had proposed the creation of a bad bank. Designed as National Asset Reconstruction Company Limited (NARCL), it will pool all non-performing assets (NPAs) of banks and sell them to investors such as private equity funds, alternative investment funds (AIFs) and so on, putting a recovery plan in place. On September 16, 2021, she announced the main lines of the action plan.

Under it, NARCL will purchase NPAs from banks under the 15:85 structure, in which it will pay up to 15% of the agreed or discounted value of cash loans and issue Guarantee Receipts (SRs) for the rest. The government will provide a sovereign guarantee – valid for a period of 5 years – for SRs issued by NARCL. The guarantee would be invoked to cover the loss corresponding to the difference between the realized value (resolution / liquidation) and the nominal value of the SRs. A provision of Rs30,600 crore has been made for this purpose.

The Association of Indian Banks (IBA) has already started the process of incorporating NARCL and has applied to the Reserve Bank of India (RBI) for a license as an Asset Reconstruction Company (ARC) with a capital of base of Rs6,000 crore. Public sector banks (PSBs) will own 51 percent of NARCL’s capital. The remainder of the shareholding will be vested in 16 entities, including private banks and non-bank financial companies.

The NARCL is intended to resolve stressed loan assets above Rs 500 crore each amounting to approximately Rs 200,000 crore. During phase I it will take over fully provisioned assets of around Rs 90,000 crore while the remaining assets would be transferred during phase II.

High NPAs have haunted the Modi government since it took office in 2014. In 2016, it promulgated the Insolvency and Bankruptcy Code (IBC), a comprehensive law that gives lenders and banks the power to drag bankruptcies. defaulting borrowers to a judicial authority. He also amended the Banking Regulation Act giving the RBI the power to compel banks to act within strict time limits.

In accordance with the RBI Circular dated February 12, 2018, for accounts with an aggregate exposure of over Rs2,000 crore, as soon as there has been a default on the account with a lender, all lenders – individually or jointly – must take action to remedy the default by preparing a resolution plan. The plan was to be prepared within 6 months of the default date. Otherwise, proceedings under the IBC would be initiated by referring the case to the National Company Law Tribunal (NCLT) which would have six months to resolve.

According to a statement to parliament by Minister of State for Finance Bhagwat K Karad, the PSBs alone have recovered over 500,000 crore rupees. The NPA should have fallen as much, but the decline is only about Rs 200,000 crore and the difference of Rs 300,000 crore is due to further slippages. This figure excludes the Covid period – from March 1, 2020 to March 24, 2021 – during which banks were not allowed to recognize bad debts. At their inclusion, we could return to the level of March 31, 2018.

The much weaker-than-expected performance of the IBC mechanism has a lot to do with a revised RBI circular dated June 7, 2019 – issued by order of the Supreme Court – which removed powers from the banking regulator and gave too much flexibility to it. last in his work. the resolution plan. In fact, it made the IBC process dysfunctional.

Now the government wants the “bad bank” to do the trick. Look at the first batch of Rs90,000 crore. As these loans have been in default for more than 3 years, the banks have already fully provisioned and recognized in profit or loss. They don’t have to get that money back. They will not object to NARCL paying a very low price.

However, this prevents other Asset Reconstruction Companies (ARCs) from bidding for a higher price. Indeed, the proposed mechanism obliges NARCL to participate in the “Swiss Challenge” auction where other ARCs will be invited to improve the offer made by it. However, in this case, it will not work because the bank would play it safe by giving assets to NARCL whose SRs have a sovereign guarantee.

Regarding the remaining Rs 110,000 crore for which a lower provision has been made and the chances of recovery are better, the bank might have reason to offer a lower discount on face value. This is provided that the transfer takes place quickly. If this is delayed and the default period increases even beyond three years, the fate of these loans will not be different from the first batch either.

In short, the entire proposed bad loan book (read: Rs 200,000 crore) would be available to the “bad bank” at a steep discount from face value. What if that was set at, say, 18%?

In absolute terms, this equates to Rs36,000 crore. Of this amount, NARCL pays 15% or 5,400 crore rupees in cash to banks and for the balance 30,600 crore rupees, it will issue SRs. To redeem them, the first must make at least Rs 30,600 crore by selling the NPAs to investors. If, NARCL does not realize even a rupee, then it also does not have to worry as the SRs valued up to Rs30,600 crore being guaranteed by the Union government, the latter will pay it in full.

Short of jargon and high-sounding phraseology, the proposed “bad bank” is just an attempt to use taxpayer money to bail out banks affected by NPAs. Put simply, out of the Rs 200,000 crore, the Union government will give Rs 30,600 crore as sovereign guarantee and the rest (without a small amount of Rs 5,400 crore) as direct budget support. .

The government should stop using spurious methods. Instead of taking a roundabout route, making things non-transparent, creating new institutions, adding administrative and overhead costs, etc., he should frankly accept the urgent need to inject so much capital into banks and to give it from the budget. . Over the past four years, this has given them 300,000 crore rupees to deal with their NPAs; this can give another crore of Rs200,000.

At the same time, to recover bad debts and stop their proliferation, the IBC system should first be revitalized by reinstating the circular of February 12, 2018 and by strengthening the NCLT; second, the rapid elimination of challenges to NCLT orders before the High Courts and SC; third, intensify ‘tracking’ and ‘surveillance’ within banks for early detection of bad loans, including fraud (now it takes years for them to report) and finally, stem corruption and nepotism.

Without these harsh measures, the wave of NPAs will not stop forcing the government to bail them out repeatedly.

(The author is a policy analyst. The opinions expressed are personal.)