Resolution of bad bank loans is one of the most important reforms
The Reserve Bank of India has finally taken steps to direct banks to deal with 12 large troublesome accounts in a time bound manner under provisions of the Indian Bankruptcy Code (IBC), 2016. What happens to these bad loan accounts is crucial not just for the various stakeholders of these companies. As this would be the first time that India will be witnessing such action, its success or failure and process followed in the exercise is extremely important for the future of the Indian PSU banking space which is still largely corporate loan driven.
RBI needs to instruct banks that they should follow a transparent process during this exercise. Transparency is important from the perspective of the banking system as creditability is at stake, but there are shareholders of these companies who have the right to know what is happening to companies they are invested in so that they can take a decision whether to stay with those companies. Over the last few days, a lot of speculation has taken place in the media about which company has received notice under IBC 2016 and which one will be receiving it shortly leading to volatile movement in their stock prices.
It needs to be borne in mind that neither the companies involved nor banks have made any sort of official announcement with regard to such notices being sent or received. So, market regulator Sebi should ask stock exchanges to direct companies to follow a process whereby if there is any development with regard to banks they should inform the stock exchanges so that minority shareholders also have correct information, rather than being dependent on selective leaks.
Another important aspect of this resolution is what would be the key focus area of banks when they take companies concerned through the process as defined under the IBC. Will the focus be on taking over these companies with a view to sell their assets to salvage whatever part of the loan amounts they can? Or, will it be on restructuring the companies in such a way that over the long run the banks can recover their loans and the interests of the stakeholders are taken care of. In the last few months, the focus has been only on two things: what will happen to money which banks have lent to promoters and second, what will the promoters get thrown out of their companies.
However, lost in all this has been the issue of employees of the companies which have run up bad loans. It needs to be asked whether banks will consider protecting their interests when they sit across the table to decide the fate of companies in joint lender forums — a large number of which have already started taking place over the last weekend. These employees are an equally important part of the companies, more so because the job scenario is not rosy.
To make the whole exercise successful, a prudent approach would be to ensure that businesses, which have a fair chance of survival if their debt repayment costs are rescheduled, should be given a chance to stand on their own feet. For that to happen, banks will have to take a haircut on their loans which might be more than normal.
Policy makers need to concede that despite their best intentions, some decisions taken by bankers could go wrong. As these could stand the prospect of being red flagged by investigating agencies, policy makers need to ring fence bankers, who make honest errors of judgement, from being hauled up by the investigating agency at a later stage. It is necessary to sort out all the loose ends in order to get the exercise off to a credible start. The stakes are high for the resolution of bad bank loans is one of the most important reforms going forward.