COVID 19 has caused a slowdown in the economy due to lockdowns and movement restrictions. It also has an impact on financial health of banks. As of December 2019, banks have 9.7 lakh crore Non performing Assets – NPA’s. Estimates suggest fresh 5.5 lakh crore assets will become NPA’s. Considering such impact of COVID, Insolvency and bankruptcy code(IBC) provisions for initiating insolvency against defaulters are suspended for 1 year. However, India needs a strategy to tackle the inevitable rise in NPA’s due to economic slowdown.
Management- Far too many loans are done without adequate due diligence and without adequate follow up. Collateral when offered is not perfected, assets given under personal guarantees not tracked, and post loan monitoring of the account can be lax. The lessons of the recent past should be taken seriously, and management practices tightened.
Moral Hazard- banks undertake “special services and risks” for the government and are compensated in part by the government standing behind PSBs. The result is that PSBs fund infrastructure and other projects in private sector with lack of risk mitigation. The resultant losses erode banks’ capital which are periodically recapitalized by the government. This bargain has induced employee moral hazard and disincentive to perform.
Bad Bank- Currently banks can sell their stressed assets to private owned ARC’s – Asset Reconstruction companies. Intention of ARC’s is reconstruction where the economic value of stressed assets is increased. But ARC’s have failed in reconstruction of companies. They merely collect pending dues. Even this recovery is low at around 9.5% of total stressed loans amount. In addition, public sector banks(PSB’s) sell these stressed assets at low rates. CVC report on assets sold between 2013-14 and 2017-18 by PSB’s highlighted low prices in at least 48 cases. It also highlighted how prices do not factor in stocks and equipment of these stressed assets. Such reports have reduced asset sales by banks to ARC’s in fear of adverse CVC/CBI/CAG reports. A bad bank can overcome these issues and help faster resolution of stressed assets.
Regular Monitoring of loans- Private lenders are able to keep their NPA’s in check primarily because their regular monitoring system is effective in keeping the borrower on his toes. It is popularly said that it is difficult to get a loan from Public sector bank but once attained, you pay back as you wish. On the other hand, private lenders keep looking for borrowers because they know how to get their money back. The problem is not so much of availability of money with the borrower as it is about intention of the borrower not to pay back.
Conclusion PSB reform and concomitant credit discipline is necessary not only to catalyze economic growth, but also to broaden and deepen financial market. It is hoped that the government will take the bull by horn and implement PSB reforms without further delay lest the employee moral hazard and corporate-PSB crony capitalism results in unmanageable PSB crisis.