RBI’s new NPA norms: the spirit is willing, but flesh is weak

The intent of RBI’s discussion paper is admirable, but the norms,
 if notified, will take some implementing and a long time to yield results.
 Photo: Bloomberg
Mint : Ravikrishnan :21 Dec 2013

The RBI’s discussion paper on bad loans is unlikely to 

change market perceptions towards state-owned banks 

While the intent of the Reserve Bank of India’s (RBI’s) discussion paper for early recognition and tackling of bad loans is admirable, the norms, if notified, will take some implementing and a long time to yield results. It also does not quite tackle the factors that are leading to deteriorating asset quality in the first place. It isn’t, therefore, likely to change market perceptions towards state-owned banks.

The thrust of the discussion paper is basically to recognize non-performing assets (NPAs) as soon as possible and for lenders to come together and collectively plan a resolution within a time frame. The RBI also proposes to make it easy for banks to sell distressed assets by letting them spread losses over two years and allowing leveraged buyouts. But that is easier said than done.

Specifying a timeframe can also put additional pressure on banks while negotiating with borrowers. Recovery of loans is a long drawn out process in India, with the courts getting involved. Asset reconstruction companies, which were supposed to shorten this process and focus on recovery, have also not been very successful.

Perhaps the RBI’s intention is not to just allow restructuring of loans, but the restructuring of companies since it is advocating leveraged buyouts (LBOs). However, even that is not easy for listed companies because of a whole lot of norms put in place by the capital markets regulator. A buyout will not only mean buying the promoter stake, but also that of the public, in which case de-listing norms will kick in bringing a new set of headaches, said a corporate law expert.

In that scenario, the proposal that promoters necessarily inject some equity or transfer some portion of their equity to the lenders makes more sense. Even better is the suggestion that promoters transfer their holdings to a security trustee till a turnaround of the company—something which will enable a quick change in management control, if the lenders want. But sadly, as Fitch Ratings points out, “This will not be possible unless banks proactively come forth in recognizing lapses in their credit management framework.”

That is particularly true for state-owned banks which bear the brunt of the bad loan problem in the system. They “suffer from some structural deficiencies related to the management and governance arrangements,” said RBI deputy governor K.C. Chakrabarty in a recent speech.

The cross of government ownership that this set of banks bear is anyway evident in their valuations, too. Most of them are trading below their estimated book value for this year. These new set of norms could aid in recovery, but when and how remains to be seen. For a re-rating to happen, a sustained economic recovery still remains the necessary condition.