According to R Gandhi, who recently retired as the Deputy Governor of the Reserve Bank of India, bad loan resolutions to have expected results may require bankers to be daredevils and take tough decisions till a practical solution comes forward.
"Good banking is produced not by good laws, but by good bankers," reads a quote by Hartley Withers, a prominent British financial journalist around the turn of the 19th century. It could perhaps hold true for the Indian banking mess, too.
Though Indian bankers may have been 'good', they have been burdened with heavy bad loan resolution tasks under the prevailing laws in India.
According to R Gandhi, who recently retired as the Deputy Governor of the Reserve Bank of India, for bad loan resolutions to yield results, bankers might have to turn daredevils and take tough decisions till a practical solution comes forward.
"There has to be daring and there is no incentive to be daring but it has to be the inner kick or conscience of the banker which may prompt him or her to take tough decisions for now till the bad bank or other resolution schemes work out," Gandhi said in an exclusive interaction with Moneycontrol.
For over three years now, bad loans worth about Rs 7 lakh crore, or 9 percent of the total banking credit, have been a pain point for Indian bankers and resolving them has not been on expected lines.
Despite the availability of several resolution mechanisms including Corporate Debt Restructuring, Strategic Debt Restructuring, Scheme for Sustainable Structuring of Stressed Assets (S4A), bankers still have made no headway.
"Unfortunately, the clean-up exercise is still on. Hard decisions need to be taken now… Bad loan resolution schemes are not working only because bankers do not want a resolution of their NPAs; they were only wanting to postpone the problem," Gandhi said, adding that the actual problem was because the decision of bankers often came under the scrutiny of our legal agencies such as the CVC (Central Vigilance Commission) and CAG (Comptroller and Auditor General).
Earlier, bankers successfully sold many assets to asset reconstruction companies (ARCs) but were offloaded at a discounted price. However, after the government agencies questioned the bankers over the haircuts they took, bankers developed cold feet and demanded 100 percent of their net asset value from the buyers, which did not make business sense for ARCs.
Gandhi says there is no dearth of professionals to value properties, and buyers and sellers can assess them individually and negotiate a price.
"But well-meaning chiefs of PSBs (public sector banks) have no confidence in taking decisions. Also, the Enforcement Directorate and other agencies say why they [bankers] should fear if they have not committed a mistake and if they have committed a mistake then they have the right to question. So, it is a conflict... It is a complete vicious circle; everyone says something has to be done but no one is helping."Demonetisation
Less keen to talk on the most discussed topic, Gandhi says that the RBI has not disclosed figures on remonetisation (the worth of old notes so far collected) as people may not be able to appreciate the numbers at this time.
"Certain things you can appreciate only a little later because by then people would have seen the benefits…I personally think the remonetisation was faster than estimated," Gandhi said.
In hindsight, after all the backlash from the public and scathing media reports, Gandhi says: "We decided to print Rs 2000 notes in order to meet the value of the currency faster. In hindsight, I feel we could have printed Rs 500 notes also parallelly (sic) perhaps. But this is again in hindsight only."
During demonetisation, even as RBI put restrictions on most cooperative banks to not accept old notes, enforcement agencies raised suspicions over a few banks opening new accounts by accepting the old currencies and indulged in money laundering activities. Restrictions were put owing to their perceived inefficient checks and balances. However, this also led to substantial reduction in their liquidity causing major financial ill-health.
Speaking about the dire state of co-operative banks in India, Gandhi pointed out that strong “political nexus” and “inherent weaknesses built in the co-operative nature of the system cannot be wished away”.
Low repayment rates and high non-performing assets (NPAs), undercapitalisation, state patronage, political rent-seeking, and corruption are the chronic problems faced by co-operative banks in India today, he said.
The co-operative banking system, an important channel for inclusion of the unbanked segment of the population in India, has a three-tiered structure comprising state cooperative banks (StCBs) at the state level, DCCBs at the district level, and Primary Agricultural Credit Societies (PACS) at the village level.
However, unlike in the US and Europe where credit societies have limited scale and a superior separate banking structures, in India cooperative societies have been allowed to become banks and are facing problems around poor management, operational profits, competitiveness, and governance.
The rural cooperative banking structure in India has the largest outreach anywhere in the world with over 120 million customers in rural credit delivery.
Gandhi says that our law needs to be amended to weed out political control and improve governance of cooperative banks. With limited regulatory control, the RBI has time and again imposed restrictions on executive functions of these banks but cannot interfere at the Board level due to its democratic nature.
According to him, of the about 1500 cooperative banks, about 50-60 have been problem banks and it may not be a systemic issue.
"Also, if thse banks, which have much cheaper credit availability, are allowed to be commercial [quote market rates], it would not be accepted."
On-tap Bank Licences
The former RBI official also highlighted that on-tap universal licensing has been "called the bluff" as banking is a crowded space now and in order to provide financial services, one does not require to become a bank."Capital is a key factor and only corporates have it. Globally, we have seen that corporates have not been allowed to enter this space. Financial institutions are already making profit margins on loans; deposits aren't interesting because they have to pay more on it. Hence, there is no value in becoming a bank for them," Gandhi said.