The Union finance ministry and the Niti Aayog have recommended that the government set up an asset reconstruction company (ARC) and transfer troubled assets of the banking sector to its books. This will clean up the balance sheets of banks — a majority of them in the public sector — and prepare them to lend to the corporate sector as and when economic activity picks up speed. It’s been at least eight months since the proposal was first floated by the finance ministry. Subsequently, the Niti Aayog, too, independently suggested such a plan. Understandably, the prime minister’s office has held back on a decision, given the political fallout of bailing out banks. Banks lent recklessly in the past to the corporate sector, and some industrialists amassed immense personal wealth by putting in less of their own capital but borrowing big on their companies’ books. Even as his government fends off the Congress’s “suit boot ki sarkar” jibe, Prime Minister Narendra Modi would not want to open another front.
But the government must realise that the banking sector is in the midst of a crisis. The non-performing assets (NPAs) and restructured loans of scheduled commercial banks have only increased over the last two years. They stood at over 11 per cent of total advances in September 2015. During 2014-15, the Reserve Bank of India took several steps, which Governor Raghuram Rajan thinks will help clean up banks’ books by 2017. Some of the schemes have provoked scepticism. For instance, banks have taken majority control in about 15 companies under the RBI’s Strategic Debt Restructuring scheme but nobody is enthused because promoters have left little in these companies for banks to recover. Rajan has expressed discomfort with the idea of dipping into taxpayer money for the ARC’s equity because he sees a “moral hazard”. Why, after all, should the taxpayer pay for the wrongdoing of the private sector, and the negligence of the banks? But if banks and corporates are forced to pay for the mess, a state-backed ARC would bring credibility to the asset recovery programme.
In the US, the Troubled Assets Relief Programme (Tarp), which got Congress approval in October 2008, forced several restrictions on recipients, which included Citigroup, General Motors, AIG and Chrysler. The average compensation of the top 25 executives in the original seven recipients was slashed by more than 50 per cent. In fact, in the US, the cumulative collections under Tarp, as on December 2015, exceeded total disbursements ($475 billion) by $12 billion. Of course, in the US, movement of private-sector professionals in and out of government is seamless. A Tarp-like programme makes sense in India too, but the government has to give its managers a free hand, and a compensation package that attracts global talent.