Bankers, investigative agencies discuss resolution of bad loans

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Mumbai: The Reserve Bank of India (RBI) hosted on Wednesday a meeting between bankers, members of the Bank Board Bureau (BBB), Central Vigilance Commission (CVC) and Central Bureau of Investigation (CBI) for a freewheeling discussion on resolution of stressed assets.

The meeting comes in the backdrop of attempts to reduce the level of bad loans on the books of banks. Public sector banks, which fall under the purview of the CVC, have been reluctant to take haircuts on bad loans for fear of being questioned about their decisions later. This fear has slowed the process of resolution.

RBI is trying to bring all stakeholders together to address these concerns.

According to two people who were part of the meeting, the agenda was to discuss the differences between banks and investigative agencies, when it comes to resolution of loans. In particular, norms announced by RBI this week which allow banks to convert part of a stressed firm’s debt into equity were brought up for discussion.

“We shared our anxieties around investigative agencies and their involvement in commercial decisions taken by banks, while they talked about their role in the economy,” said one of the two people quoted above, a senior banker who sought anonymity as the meeting was confidential.

According to the second person quoted above, bankers explained how the Scheme for Sustainable Structuring of Stressed Assets (S4A) would need complex restructuring, which should be looked at as business-related decisions.

“The proposed overseeing committee would be closely monitoring the procedures involved in structuring deals and would ensure that rules are being properly followed. This should give some comfort to the CBI and CVC,” the second person said, also speaking on condition of anonymity.

Under S4A, banks can convert the unsustainable part of a stressed firm’s debt into equity or long-term equity-like instruments, to be held in their investment books, allowing for the debt burden to come down for these firms. This conversion is only on the condition that banks set aside up to 20% of the total funded liabilities in a case as provision, while not allowing any rescheduling or interest reduction in sustainable debt.

As part of the circular released on Monday, RBI said that an Overseeing Committee, set up by the Indian Banks Association (IBA) in consultation with RBI, and comprising eminent experts, will independently review the processes involved in preparation of the resolution plan under S4A.

IBA has proposed the names of Janki Ballabh, former chairman of State Bank of India (SBI), and Pradeep Kumar, former vigilance commissioner, for the overseeing committee, the two people quoted above said.

RBI would have to give its approval to make their appointments final.

Ballabh, who was SBI chairman between 2000 and 2002, was also the vigilance commissioner for three years till 2005. Kumar, a former civil servant, served as vigilance commissioner between 2011 and 2014. The panel would act as an advisory body, RBI guidelines said.

On more than one occasion, bankers have complained about the trouble they face due to excessive scrutiny from agencies such as the CVC and CBI when taking serious business decisions. In an 11 April interview with Mint, finance minister Arun Jaitley said that the government is considering creating a central body which can help bankers in decisions on loan settlements.

The attempts to improve and hasten the process of bad loan resolution comes against the backdrop of soaring non-performing assets (NPAs). Bad loans of the 40 listed banks have surged to Rs.5.8 trillion after RBI conducted an asset quality review (AQR) and asked banks to reclassify visibly stressed assets as bad loans.

“No matter how much conversation you conduct, taking decisions in India is difficult. The best option is to employ competent people to run a solid process and resolve the stress. On the bank side, government agencies should just lay off and let the bankers do their job. The government should also probably look at an agency that accumulates large debts where there are multiple lending companies, so that the resolution process is quick,” said Abizer Diwanji, partner and head (financial services) at EY.