RBI’s restructuring window: Speedy resolution or Bullet-proof scrutiny? Over-caution has own risk

RBI’s faith in credit rating agencies, despite their dismal track record, is hard to understand.

‘Those who cannot remember the past are condemned to repeat it,’ said George Santayana. Well, the Reserve Bank of India (RBI) seems to have taken the great Spanish writer and philosopher’s warning to heart. The one-time restructuring scheme announced by the Bank as part of its Monetary Policy Statement released on 6 August 2020, RBI is clearly coloured by its experience, both of the earlier Corporate Debt Restructuring Scheme and the surge in bad loans following regulatory forbearances allowed post the Global Financial Crisis in 2008.

The net result is that though banks have been given the ‘window’ they were clamouring for under the 7 June 2019 Prudential Framework to ‘implement a resolution plan for eligible corporate exposures and without change in ownership’, even while classifying such exposures as standard assets, this comes with so many conditions as to make it virtually a non-starter. The related circular list as many as 23 conditions, starting from eligibility – only those accounts classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020 – to vetting of resolution plans by an expert committee.

The aim, as a business daily put it, is to ‘bullet-proof’ loans. A noble intent! Especially in a scenario where RBI’s latest Financial Stability Report estimates NPAs to rise to 14.7% by March 2021 in a severe stress scenario. Except that loans, by their very nature, can never be bullet-proofed. Remember, banking is the business of taking risks. In fact, one of the problems facing the economy today is that banks seem to have forgotten their ‘dhanda’. They are no longer willing to take risks but are happy to park their money either in risk-free government securities or with RBI through its reverse repo window.

 Which is why it is important, though exceedingly difficult, for RBI to send the right signal/strike the right balance between prudence and allowing banks to exercise their commercial sense. Too much prudence means no bank will ever give a loan, while too little prudence risks losing depositors’ (and ultimately, taxpayer) money, since no government can allow a large bank to sink.

This is where some of the ‘specific conditions’ listed by RBI for the one-time restructuring call for a re-think because they risk undoing the very rationale of restructuring, which is to keep borrowers, banks and the economy afloat despite the huge disruption in economic activity on account of the pandemic. Take the more deleterious of these: that an expert committee will lay down the financial parameters and sector-specific desirable ranges of these parameters that would have to be factored into each resolution plan. The committee’s recommendations would then have to be approved by RBI which will ‘notify the same, along with modifications, if any, within 30 days.’ The committee will also be responsible for vetting all resolution plans where the outstanding is Rs 1500 crore and above.

Further, resolution plans for such accounts (as in the case of accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is Rs100 crore and above) will require an independent credit evaluation by any one credit rating agency authorized by the Reserve Bank under the Prudential Framework. RBI’s faith in credit rating agencies, despite their dismal track record, is hard to understand. More importantly, given that the entire process is likely to be time-consuming and any resolution framework must be invoked not later than 31 December 2020 (we are already into the second week of August), we are unlikely to see much meaningful restructuring.

At a time when each day’s delay is only going to worsen borrowers’ distress, restructuring must strike a balance between speed and efficacy. Yes, speed might mean a few slip-ups, but remember the old saying, ‘nothing venture, nothing win’! Being over-cautious carries its own risks.

• NR Bhusnurmath is Adjunct Professor at Institute of Management Technology. Views expressed are the author’s own.