The scales tilt more in favour of the RBI standpoint over the five issues that are being hotly debated
The perceived difference of opinion between the RBI and the Finance Ministry would take its course and few know the powers of each entity when it comes to imposing its view on the other at the practical level. Given the way the arguments have been put forward by the government, it would be interesting to debate both sides of the issue.
There are essentially five issues that have come up in the debate. These can be found in the RBI circular of February 12, and they relate to NPAs (non-performing assets), tweaking PCA (prompt corrective action) norms which put some restraints on the banks concerned, providing liquidity to NBFCs, furthering lending to the SME segment, and deploying the reserves of the RBI to fund the Budget.
From a purely economic standpoint, all these issues are quite fundamental in nature and can provide solutions if there is acquiescence.
Let us first look at the IBC (Insolvency and Bankruptcy Code) related issue. The IBC was a major path-breaking reform brought in by the government to address the issue of NPAs when all else failed. The RBI, in its February circular, only cemented the rules by mandating that if a loan is in default even for a day, the resolution process has to be set in motion for 180 days, after which the the IBC would take over.
This action was applauded as it gave teeth to the IBC for solving the NPA problem. There could have been arguments on the number of days involved, but the contrary view came in when the power sector pleaded for exclusion, as given the specific problems they faced, most companies would come under the IBC. Can an exception be made?
There are two arguments against making exceptions. The first is that when exceptions were made under corporate debt restructuring, that proportion bloated to almost the size of the NPAs.
Second, if allowed for power, why not for steel, telecom or textiles? The arguments could go on and it would be back to square one and the IBC resolution process would lose its effect. The question to ask is whether we are serious about solving the NPA problem or not? If we are not, then we should not be complaining about NPAs building up.
SME lending
Related to this issue is the one on SMEs. When demonetisation happened, the RBI made an allowance for NPA recognition for this segment. The RBI does not lend to SMEs but creates an enabling framework for them, and this already exists. The priority sector lending guidelines, howsoever restrictive they may be for banks, defines how SMEs get their share.
Should banks be pushed to lend more to this sector just because it is important for the economy and cannot get finance elsewhere? This needs to be answered because if credit appraisal processes are relaxed and an unfavourable NPA portfolio results, then who would be held responsible? Infra lending is a case in point and banks have been struggling with the consequences for over two years now. By relaxing the IBC norms and forcing lending to SMEs we would be merely kicking the can again.
Third, let us look at the PCA rules. Banks which have been defined to be weak have lending restrictions placed on them until they turn the corner. In the present environment, where liquidity is an issue, there is an argument to allow the 11 banks under PCA to get some exemptions. This is analogous to a student who has failed class 9 exam but is allowed to go to class 10. The irony is that the net worth of these banks ís in jeopardy, with the main shareholder, the government, not willing to provide capital (as the approach has been to give capital to the more productive banks).
Now if these banks are not well capitalised and are struggling with NPA recognition and provisioning, letting them enter the mainstream can exacerbate the situation. This again does not look agreeable. The only compromise possible is that they lend only to top-rated PSUs so that the funds remain within the government.
Funding NBFCs
Fourth is the issue on liquidity to NBFCs. The RBI provides funds to banks which are on-lent to others, which include NBFCs. The RBI’s role can be to the extent of ensuring liquidity in banks through repo, OMO (open market operations) and possibly CRR cuts. This is being done on a continuous basis.
Opening a window for NBFCs is an option, but if this is done, similar allowances may be sought for other sectors too.
It would become like the QE (quantitative easing) programmes of the West, where the banking system had all but collapsed and the central banks had to intervene and buy commercial bonds from entities. This again may not sound right to the conventional minded economist.
Today, banks have funds and are selective while lending based on credit perception. So it is more a case of liquidity being there but judgment coming in the way of the flow of funds.
Last is the question of whether the government should take the reserves of the RBI and use them to fund the Budget. In legislative terms they may have the right but this is not a good idea as it is a one-time transfer like disinvestment, once exhausted the problems resurface.
Using reserves can be for specific purposes but not for balancing the Budget. Using this theme, one can also then ask whether the government can take the reserves of PSUs proportionate to its holdings in the entities for the same purpose? The government already makes some PSUs pay larger dividend at times when the Budget is stressed.
The present situation definitely calls for introspection and the need to reformulate our premises. One can quote Ayn Rand’s famous words, “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.”
As a corollary, are we really committed to cleaning up the system? In this context, it would be apt to mention Shakespeare’s well-known saying, “This above all: to thine own self be true.”
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