It is not clear why acting Finance Minister Piyush Goyal has brought up the idea of a so-called bad bank all over again. The Centre has set up a panel under the leadership of the chairman of Punjab National Bank to look into its viability. The Economic Survey, 2016-17, had made a case for a PARA (Public Sector Asset Rehabilitation Agency) bank, but once the Insolvency and Bankruptcy Code (IBC) came into force the idea faded out, and for good reasons. A bad bank, the argument goes, will concentrate all toxic assets under a single roof, cleaning up the balance sheets of banks and helping them lend more freely. There are two difficulties with this idea. First, the track record of even the private asset reconstruction companies does not inspire confidence, and there is no reason why one manned by the government should do any better. Second, a sale of assets at a discount should in principle be transparent, since the taxpayer picks up the tab. The IBC process is decidedly more open, besides being creditor-driven and rules-based in terms of laying strict terms for the bidders. It is apprehensive of existing promoters participating in the takeover plan. While picking holes in the working of IBC, this big picture should not be forgotten.
Teething troubles are to be expected in a process that marks a welcome break from the earlier slew of schemes and laws that seemed to fail in terms of asset recoveries, revival of the concern or speedy resolution of NPAs. It also seems a tad inaccurate to argue or anticipate that recovery rates are likely to be inadequate in most sectors, except cement and steel where the outlook is improving.
The Centre’s bad bank plan comes in the wake of a Reserve Bank circular issued in February, which directed banks to identify stressed assets immediately on default and “resolve” the account within 180 days, and no more. Resolution implies settling dues, selling the asset, restructuring terms or changing ownership. Bankers, it appears, are looking for a relaxation of both resolution and classification norms, with their books already awash with NPAs. Large borrowers stand to suffer a credit downgrade. The impression being conveyed is that power sector dues seem hard to resolve within the IBC framework. There may be a case for relaxing the 180-day norm, but this needs to be carefully considered and if necessary carried out within the IBC framework.
This is not to deny that each sector could have its own nuances and oddities. But the solution here is to expand the orientation and scope of inquiry of Insolvency Professionals. The IBC keeps at bay, for all its niggles, suggestions of crony capitalism. The debt restructuring schemes discontinued as per the February circular were not entirely free of this problem. This may return once a bad bank comes into effect.