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Cleaning the mess

The recently promulgated ordinance to amend the provisions of the Banking Regulation Act of 1949 is a welcome legislation for the banking fraternity. It provides enormous powers to RBI to intervene in issues relating to distressed assets of banks, including directing banks to file bankruptcy cases against defaulters without even having to wait for the mandatory period of time for a defaulted loan to turn into a NPA. The government is clearly placing the responsibility of sorting out the NPA issue on RBI.

Banks have hitherto been hesitant in initiating penal action on defaulters or squaring up bad debts fearing there could be repercussions, including enquiries by vigilance and criminal investigation agencies. The ordinance removes this apprehension. It has provided for the setting up of a committee by RBI to decide on the price of a distressed asset and on the buyer of this asset. The decision of the committee would therefore be considered as above board.

What seems bothersome is the executive role that is expected of the RBI.

Regulators the world over are essentially framers and implementers of monetary policy. They ensure consistent growth in the economy, bring about stability of the financial system and undertake printing and distribution of currency. Resolving NPAs is normally not part of their portfolio. It is also not a central bank’s job to be taking operational decisions and implementing them. And central banks have limited infrastructure to enforce decisions with regard to banks’ NPAs.

But, Indian banks are facing abnormal times. They are in a virtual NPA trap and existing legal framework has proved to be ineffective in resolving this crisis. The government has rightly thought the regulator is the correct entity to intervene.

RBI has been assuming proactive roles in the past, especially under the regimes of the last couple of its governors. It was in fact governor Raghuram Rajan, who brought out the NPA malady in the banks in the first instance and gave an ultimatum to them to clean up their balance sheets. Naturally, RBI should lead from the front in times of crisis and ensure that there is resolution. There are also examples of central banks in various countries intervening in crises and setting things right.

The goal is to overcome the crisis that is NPAs. It is the government banks that are the worst-hit and if the government thinks the regulator can do well in resurrecting the situation, it has every right to direct the RBI to undertake this task.

What is reassuring is that henceforth there would be no unwanted vigilance inquiries and threats of prosecution on bank employees as any action to clean the mess will have the stamp of approval of the central bank.

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