Punjab National Bank CEO Sunil Mehta-led panel's 5-point formula to resolve NPAs in the banking system has come up with some outrageous recommendations that are largely aimed at deferring the inevitable, rather than resolving the NPA mess. That the government has already accepted the recommendations is even more intriguing.
It is also truly uni-dimensional as it only looks at the bankers' perspective, which is hardly surprising considering the panel comprised only PSU bankers. SBI Chairman Rajnish Kumar and Bank of Baroda's BS Jayakumar are the other members of the panel.
First, the speed with which the panel set up by the Finance Ministry on June 8 decided on the solutions itself raises a lot of questions. How did it deal with such a complex issue within a fortnight? Why were only bankers appointed on the panel? Moreover, why were only PSU bankers on the panel?
Let's examine the futility of most of the recommendations:
For loans up to Rs 50 crore, the panel has suggested a steering committee within the bank to resolve it within 90 days. Most banks already have this process in place for focused resolution. Providing another 90 days for resolution is futile because the loan is a bad loan precisely because it has already crossed the 90-day limit set by the RBI. By giving it another extension of 90 days, the panel has subverted the RBI's circular of February this year that mandated the banks to report a bad loan to RBI by the 91st day and plan to take it to insolvency thereafter. Surprisingly, it has even suggested giving additional loans to revive the asset. That amounts to ever-greening, just what must be avoided for non-performing assets.
For loans of Rs 50-500 crore, the panel has suggested another bank-led resolution within 180 days. This process already exists under the Insolvency and Bankruptcy Code. By giving another 180 days, the panel has provided a buffer to the defaulting company when their default and non-performing asset has already been recognised. The resolution again has to be approved by 66 per cent of creditors. This provision already exists in IBC.
For loans above Rs 500 crore, the committee has suggested setting up an asset management company with private participation. A specialist AMC just to resolve these assets is a retrograde move. It reflects the panel's refusal to take the bull by the horns. In its effort to turn around the asset, the AMC will defer the inevitable for a few more years. Corporate turnarounds are painful processes that are best left to experts such as the 24 Asset Reconstruction Companies and nearly 4 dozen AMCs that are already in operation in the country.
The panel's other suggestion is to set up an Alternative Investment Fund that will raise resources from banks and institutional investors so that it can bid for the insolvent assets under insolvency and bankruptcy. Should the banks that have themselves taken those companies to insolvency really bid to buy the same assets? We leave that to your judgement.
The fourth approach is to go to NCLT for insolvency and bankruptcy. Doesn't that option already exist?
The fifth suggestion is an asset trading platform for stressed assets. This is, perhaps, the most sensible solution to deal with sale or liquidation of stressed assets transparently.
In conclusion, it appears that the panel of bankers was more focused on framing rules to defer decisions instead of taking the problem head-on. This protects their brethren-already rattled by charges of corruption and mismanagement-by postponing recognising bad loans by an additional 90 or 180 days.
But for how long?