11 May 2017 15:54 IST

Being a banker doesn’t suit the RBI

Resolving bad loans is a messy affair, it’s a job best left to empowered bank boards

Such has been the concern over banks’ rising pile of bad loans and historically low credit growth, that the Centre’s new ordinance has mostly found optimists lauding it as a path-breaking move.

Under normal circumstances, the ordinance that essentially empowers the Reserve Bank of India to micromanage bank decisions on resolution, would have bankers and critics of the old school crying foul.

But these are extraordinary times that call for extraordinary measures. True, despite the relentless effort of the central bank to put banks’ affairs into order through various tools to resolve stressed assets, there has been little progress on the ground.

Toss in restructured loans, and the tally of stressed assets could well be upwards of ₹10 lakh crore.

Last ditch effort

The ordinance which empowers the RBI to set up oversight panels to look into loan recasts, is being viewed as a desperate, last throw of the dice. With the RBI forcing all lenders to come on board with debt restructuring, the resolution could after all pick up pace. But will banks that have now been stripped of their decision-making authority be able to take key decisions on lending henceforth? Most importantly, will the RBI be able to act as a prudent and independent regulator after it muddies its hands in the mundane affairs of banks?

Why did things have to come to such a pass that the regulator has been forced to don overalls and dirty its hands on the shop floor? The RBI has been active in prodding banks to clean the NPA mess starting with the Joint Lenders’ Forum, and the SDR and S4A schemes. Realising that banks were chary of even recognising non-performing loans, the regulator brought in the asset quality review (AQR) in FY16.

The AQR was touted as a major clean-up activity, one that would allow banks to start off on a clean slate. Forgotten were the important issues of inadequate credit appraisal systems and shoddy lending practices that caused the problem in the first place.

Where the buck goes

But the mess, as it appears, did not end with AQR. Private banks which got off with a shorter AQR list, had some catching up to do.

Realising that there were still divergences in asset classification and provisioning compared to its norms, the central bank last month issued a circular requiring banks to make suitable disclosures pertaining to FY16.

Axis Bank now says that loans to the tune of an additional ₹9,478 crore should have been declared as NPAs in the FY16 fiscal itself; the bank had reported gross NPAs of ₹6,087 crore only as of FY16. According to the ICICI Bank management, the RBI assessed incremental bad loans to the tune of ₹5,100 crore as part of this exercise. The two banks explain the under-disclosure in FY16 saying that they accounted for the same during FY17, before the RBI issued its directive last month.

The fact that the RBI had to issue so many directives and circulars on the operational front alone highlights the critical governance issues at banks.

The RBI will now step into banks’ shoes to clean up the bad loan mess. The fact that it will — under the authorisation of the Centre — instruct banks on how to tackle specific accounts raises questions on the central bank’s autonomy. The preamble to the RBI Act 1934 indicates two core functions of the RBI — issue of currency and monetary authority. The legal mandate for other key functions and responsibilities comes from specific statutes — The Banking Regulation Act 1949, The Foreign Exchange Management Act 1999, The Payment & Settlement Systems Act 2007.

In 2011, the then governor of RBI, Duvvuri Subbarao, in one of his speeches had clarified that the RBI has not been accorded autonomy under the statute.

The RBI Act lays down that the Centre may give directions to the RBI, after consultation with the governor, in the public interest. In reality however he re-iterated that the RBI operates with a functionally autonomous mandate and there has been no instance so far of the Government exercising its reserve powers to issue a directive.

That was then. The Centre’s demonetisation move changed that. Questions about the RBI’s independence and credibility have been raised since then. According to the two new insertions in the Banking Regulation Act — 35 AA and 35 — the Centre can authorise the RBI to issue directions to banks on resolution of stressed assets. Remember, these sections will stay in the Act much after the NPA problem is resolved.

Can the RBI still carry on with its implicit ‘autonomous’ image after it involves itself with bank decisions? Unlikely, as these provisions can be called upon by the Centre or the RBI any time, not necessarily in dire times.

Most of the past lending decisions leading to the NPA mess reek of political compulsions. It needs to be seen if the RBI can ring-fence its directives on resolution from political interference.

Time to dissolve BBB

Rather than mollycoddling banks and finding quickfix solutions to tackle bad loans, kick-starting reforms to improve bank governance would have been the right way to deal with the issue at hand. Sometime back, with the constitution of the Banks Board Bureau chaired by CAG Vinod Rai, expectations ran high of a drastic overhaul in governance of PSBs.

But after a year of coming into being, BBB has proved to be damp squib, thanks to the Centre’s unwillingness to let go. The BBB’s latest recommendations mooting a new Governance, Reward and Accountability Framework for PSBs could well be a non-starter.

The PJ Nayak committee had envisaged granting more autonomy to bank boards. As a first step, the Centre would do well to reduce its stake.

There is an urgent need to professionalise and depoliticise the governance structure. After all, when the economy picks up, banks will have to get on the lending bandwagon.

And to avoid repeating past mistakes, empowering bank boards will be critical.

That is the way to go rather than for the regulator to get into an operational role in banks.

(The article first appeared in The Hindu BusinessLine.)

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