Former Reserve Bank of India Governor YV Reddy on Friday said that the RBI’s approach in directing commercial banks to initiate insolvency resolution against big defaulters is “in principle not correct”, but such an unconventional measure can be justified if used for a limited time.
On the government’s plans to recapitalise public banks via issuance of recapitalisation bonds, Reddy said its success will depend upon on the design of the bonds.
Delivering the 20th JRD Tata Memorial Lecture, Reddy said the government has resorted to unconventional measures in resolving the issues with public banks. In response to a query on whether the RBI was correct in directing banks to take defaulting companies to the bankruptcy courts, Reddy said: “In the normal situation it is a responsibility of the (bank) board to do this (NPA resolution). You have an extraordinary situation, where the problem is essentially in the public sector banks, for which the owner is the sovereign. So the sovereign owns the banks, the sovereign passes the law, the sovereign owns the regulator.”
He added: “So when the sovereign is facing an (external) problem, it says that instead of we doing it, you (RBI) do it. So, in a way, I would say it is sort of asking the RBI to take the initiative in solving the problem, is not a normal phenomenon, it is unconventional. Without going into whether it is required or not, whether it will solve the problem or not, the problem is serious, unconventional measures will be justified, but, not for long. In principle, I agree with you, it is not correct.”
To resolve NPAs, the RBI has directed banks to refer 12 large NPA cases for resolution under the Insolvency and Bankruptcy Code. The 12 troubled companies being referred to NCLT under the RBI directive — including Jyoti Structures, Bhushan Steel, Monnet Ispat and Electrosteel Steels, Amtek Auto and Era Infra Engineering, among others — account for a debt of around Rs 2.5 lakh crore. For the NPA accounts other than the large 12 cases, an RBI committee had suggested that banks should be required to file for insolvency proceedings under the IBC for these accounts in case banks are unable to agree upon a viable resolution plan within six months.
Speaking on the government’s mega capital infusion plan, Reddy said its design will be crucial to ensure that it gives a fair deal to the existing promoters, private shareholders of the PSU banks and the bond market in general.
The government last month announced plans to inject Rs 2.11 lakh crore of equity in the PSU banks — comprising of Rs 1.35 lakh crore through recapitalisation bonds, Rs 18,000 crore from budgetary resources and
Rs 58,000 crore to be raised by the banks from the market. Reddy said that the difference in performance of the public and private sector banks should be attributed to governance levels in the types of banks.
To a quesntion whether the RBI needs to lower policy rate in order to boost economic growth, Reddy said the answer is not easy since it is not clear whether lower rates will boost real activity. If a reduction in interest rates improves real economic activity, without reducing financial savings, then the RBI should cut interest rates, he said.