“Those who cannot remember the past are doomed to repeat it,” said George Santayana. Well, the Reserve Bank of India (RBI) seems to have taken the great Spanish writer and philosopher’s warning to heart. The one-off restructuring plan announced by the Bank as part of its monetary policy statement issued on August 6, 2020, RBI is clearly influenced by its experience, both with the previous corporate debt restructuring plan and the surge in debt. bad debts following regulatory abstentions allowed after the global financial crisis in 2008.
The net result is that although banks were given the “window” they demanded under the prudential framework of June 7, 2019 to “implement a resolution plan for qualifying corporate exposures and without change of ownership “Even classifying these exhibits as standard assets, it comes with so many conditions that it practically makes it a non-starter. The related circular lists up to 23 conditions, ranging from eligibility – only accounts classified as standard, but not in default for more than 30 days with a credit institution as of March 1, 2020 – through review resolution plans by a committee of experts.
The goal, as one business daily puts it, is “bulletproof” for loans. A noble intention! Especially in a scenario where the latest RBI Financial Stability Report estimates NPAs to reach 14.7% by March 2021 under a severe stress scenario. Except that loans, by their nature, can never be bulletproof. Remember, banking is all about taking risks. In fact, one of the problems facing the economy today is that banks seem to have forgotten their ‘dhanda‘. They are no longer willing to take risks but are happy to park their money either in risk-free government securities or with the RBI through its reverse repurchase window.
This is why it is important, although extremely difficult, for the RBI to send the right signal / strike the right balance between prudence and allowing banks to exercise their commercial sense. Too much prudence means that no bank will ever give a loan, while too little prudence risks wasting the money of depositors (and, ultimately, taxpayers), because no government can allow much bank to sink.
This is where some of the “specific conditions” listed by the RBI for the One-Time Restructuring call for an overhaul, as they risk undoing the very logic of restructuring, which is to keep borrowers, banks and the economy at bay. flood despite the huge disruption in economic activity due to the pandemic. Take the most deleterious of them: that a committee of experts define the financial parameters and the desirable ranges specific to the sector of these parameters which should be taken into account in each resolution plan. The committee’s recommendations should then be approved by RBI who “will notify the same, as well as any changes, if any, within 30 days.” The committee will also be responsible for verifying all resolution plans for which the outstanding amount is Rs 1500 crore and more.
In addition, resolution plans for these accounts (such as in the case of accounts where the aggregate exposure of credit institutions at the time of invoking the resolution process is Rs 100 crore and above) will require an independent credit assessment. by an authorized credit rating agency. by the Reserve Bank within the framework of the prudential framework. RBI’s confidence in credit rating agencies, despite their dismal track record, is hard to understand. More importantly, given that the whole process is likely to take a long time and any resolution framework must be invoked no later than December 31, 2020 (we are already in the second week of August), it is we are unlikely to see any significant restructuring.
At a time when each day of delay will only aggravate the distress of borrowers, restructuring must strike a balance between speed and efficiency. Yes, speed can mean some slippage, but remember the old adage: “nothing goes, nothing wins”! Being too careful comes with its own risks.
- NR Bhusnurmath is Assistant Professor at the Institute of Management Technology. The opinions expressed are those of the author.