Reserve Bank Deputy Governor Viral Acharya on Wednesday said the central bank should not be in the business of creating restructuring schemes for banks to resolve stressed assets of companies and when loans can’t be rectified in three months, banks
should take such cases for bankruptcy.
“We don’t talk about any adequate reserve being kept aside to bear a loss until a loan actually defaults. Then we have the windows of time when it gets recognised as a non-performing asset and unfortunately the RBI has for a variety of reasons has engaged various forbearance schemes… that you can take 18 months or two years,” Acharya said at a function to release the book ‘India transformed: 25 years of economic reforms’ edited by former RBI Deputy Governor Rakesh Mohan.
“In one way or other, we have actually, in my opinion, contributed to this problem having become so protracted. What I would like to see us is to be more proactive and counter cyclical in asking banks to provision. You have to provision in good times to save for the rainy day rather than start looking for provisions when things have already gone burst,” he said.
On the RBI’s handling of the situation, Acharya said, “I want us to be Rahul Dravid rather than Virender Sehwag. I think around Dravid it’s holding the fort… it’s about keeping the ship in good shape. Sehwag is really about first ball six.”
“I think as a central bank our focus should really be on what’s the possible stress scenario we could end up in or whether we have additionally provisioned for that… as central bank we got the banks to provision for that. I think the number one thing I would like to change is that right now when banks makes loans, the entire provisioning that banks do is to save for the rainy day. Am I preparing for the losses that are going to take place?” Acharya said.
He said Sebi has announced its ruling that any default has to be recognised and announced publicly and informed to rating agencies in a very short period of time. “I think we should give banks three months to
rectify the accounts. If you can’t rectify the account, it’s a non-performing asset and you have to file the case for bankruptcy. RBI should not be in the
business of creating restructuring schemes for banks to
resolve these companies,” Acharya said.
According to Acharya, when covenants (between banks and borrowers) are failing, then banks should engage in renegotiations much before the defaults actually take place. “Right now what’s happening is that we are starting the process of resolving our enterprises and companies which are failing at a low point of enterprise values that our loan recoveries are only 15-25 paise on a rupee. In other parts of the world where bankruptcy system is working well and these things are done in a timely manner, the recovery value is 85-90 cents on a dollar,” he said.