Debt weight

The RBI starts process to resolve the bad loan crisis. But questions remain

By: Editorial | Updated: June 15, 2017 9:11 am
The IAC, which focused on large stressed accounts from among the top 500 exposures in the banking industry

An Internal Advisory Committee (IAC) of the Reserve Bank of India has identified 12 major defaulters who account for 25 per cent, or a fourth, of the bad loans close to Rs 7 lakh crore on the books of local banks. It has recommended that these loan accounts be referred for insolvency proceedings under the newly enacted Insolvency and Bankruptcy Code (IBC), one of the reform measures carried out by the Modi government. This marks a significant step forward in the ongoing attempts by the government and the central bank to resolve the bad loan crisis, which has weighed down lenders, prompting them to be cautious in disbursing fresh credit to industry.

The IAC, which focused on large stressed accounts from among the top 500 exposures in the banking industry, has recommended that 12 accounts with outstanding loans of over Rs 5,000 crore of which 60 per cent has been classified as bad loans by the end of FY16 be put through the insolvency resolution process. The new bankruptcy law or the IBC is aimed at providing speedier recovery of loans or swift winding up of companies within the mandated deadline of 180 days and ease the pain of lenders, who would then be able to free up capital and lend afresh. How these cases are adjudicated will be the first major test of the IBC. The challenge here is not in getting a resolution plan approved by the creditors, then endorsed by the arbiter, the National Company Law Tribunal (NCLT).

Rather, it is the price discovery process for the sell-off of assets of the defaulters that may prove challenging. Buyers may come in at a certain price or cheaper valuations for some of the distressed assets. But with business confidence at a low, there could be fewer takers than in normal times, which, in turn, could force banks to accept bigger hair cuts. However, it is unclear whether the bankers or anyone signing off on a hair cut on the bad loans after due sanction from the NCLT would be insulated from probes by the investigative agencies. Besides, there could be constitutional challenges on the validity of the new law and attempts by promoters who lose control to legal recourse. All these can stymie the efforts to resolve the bad loan crisis quickly.

For the government, there are other worries such as capitalising state-owned banks which may be forced to settle for a one-time loss or a valuation at a fraction of the original loan. At the end, the success of the latest effort will hinge on governance reforms in state-run banks, which control a large chunk of India’s banking industry.

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