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New RBI rules on NPA: Central bank must frame stronger guidelines to police borrowers, not just lenders

Madhavan Narayanan
It is time the RBI looked hard at what needs to be done in the entire process chain of borrowing, including issues related to collaterals, cash flows and above all the expected conduct of borrowing entities.

On the face of it, the Reserve Bank of India's (RBI) new norms to offset a Supreme Court ruling against its February circular that stalled its attempts to fix the resolution of stressed loans seems like a pragmatic way to balance the needs of growth with prudent banking. But look hard, and you will find that the central bank has a long way to go in putting the system back on the rails. Questions lurk in the woodworks on how to future-proof India's public sector banking system in a manner that would prevent the recurrence of a toxic cocktail of reckless lending, outmoded monitoring and crony capitalism.

Between the struck-down circular and the diluted new regime, another significant event has occurred: the re-election of Prime Minister Narendra Modi's BJP-led government. What this means is that there is a continuity in the administration in which blaming the predecessor is not an option, while there is also a need to plug the holes that have arisen in the process of managing stressed assets and the Insolvency and Bankruptcy Code (IBC).

The revised set of norms asks lenders to take an early review of borrower accounts within 30 days of default and asking them to get into an inter-creditor pact to implement a resolution plan within 180 days from the end of the review period. The lenders may initiate legal proceedings for insolvency or recovery of loans. All that sounds a bit bureaucratic though pragmatic.

It lays down a desirable road map but the elephant in the room is the behaviour of borrowers. It is time the RBI looked hard at what needs to be done in the entire process chain of borrowing, including issues related to collaterals, cash flows and above all the expected conduct of borrowing entities. It is unfair to put the onus of supervision on banks without a complementary practice where borrowers need to be classified as good, bad and ugly and punished and rewarded accordingly.

Just a day before the central bank unveiled its norms for stressed asset resolution, RBI governor Shaktikanta Das, evidently Modi's chosen man for the job, announced a third successive interest rate cut, only to find the Sensex tanking by 500 points because mortgage lender Dewan Housing Finance Corporation Ltd (DHFL) faced a credit rating downgrade that upset the market mood. The harsh fact is that RBI's problems have now also become that of stock market regulator SEBI because some Indian promoters such as the Essel group and DHFL have been cleverly using mutual funds to borrow funds.

The ghost of RBI"s pursuit of turning the heat on non-cooperative borrowers, who play hide-and-seek with banks despite their ability to repay hangs in the backdrop. Nirav Modi is now the dubious icon of banking frauds and Vijay Mallya for wilful defaulters, while Jet Airways founder Naresh Goyal stands on the margin in a tug-of-war over its future even as the grounded airline's employees rise in protest, seeking government intervention.

On the same day that Das was revealing revised norms for stressed assets, Maharashtra chief minister Devendra Fadnavis declared publicly that the government will take action against banks that refuse loans to farmers.

It is clear that India's public sector banks can neither go back to the "loan mela" culture of the 1980s nor afford to repeat the mistakes of the last decade that has resulted in a Rs 10 lakh crore pile-up of non-performing assets (NPAs). But they also cannot blindly follow the Western style of letting banks or companies fail as if it is business as usual because social pressures and the opportunity costs of corporate failures cast an impact on growth and jobs. A study last year estimated, the public sector banks (PSBs) account for 70 percent of loans but 87 percent of bad loans. We cannot apply a simplistic market-based approach in such a context.

The only reasonable way out seems to be a system in which banks can create a process of disclosures and behaviour mapping in which there is an onus on borrowers to keep the banks informed on forthcoming events and cash flow situations. Why should the economy wait for banks to spot the bad apples and lead the resolution amid judicial hurdles? Court cases linked to stressed assets and the IBC point out the need for the RBI to be smart in a manner that would prevent a judicial gaming of loans. It logically follows that taxpayers, depositors and safe borrowers should not be bearing the burden of defaulters and gamesters in an inter-connected system. This requires a rule and behaviour based lending regime because old rules based strictly on collateral can inhibit loan growth vital for the economy.

From all indications, such a transparent regime is lacking in India. If necessary, the government should consider strengthening the Banking Regulation Act that was cited in the case that led to the Supreme Court striking down the February circular.

Fortunately, new technologies can bring branches, officers and lenders into a common information system that can give dashboard views for quick action. If Amazon can give discounts and cashbacks to buyers based on desirable behaviour, why can't banks pick a leaf out of that and adapt that to borrowers? Borrowers must be held accountable in a manner that would curb a nexus between officers and bad borrowers on the one hand while minimising chances of borrowers resorting to courts to get away with defaults or unacceptable payment delays.

(The writer is a senior journalist and commentator. He tweets as @madversity)

Also See: RBI issues new NPA recognition norms: The guidelines put onus on creditors to take call on resolution plan, but will it work?

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