This article is more than 3 year old.

A 2nd anniversary gift from PM Modi to governor Urjit Patel

Mini

RBI governor devoted his second year in office to cleaning up the banking system.

A 2nd anniversary gift from PM Modi to governor Urjit Patel
Prime Minister Narendra Modi on Saturday accused the UPA government of leaving behind a “landmine” of non-performing assets (NPAs) or bad loans with  banks because of its “phone-a-loan scam" and claimed that his government has been defusing the landmine.  A few observations  on  the accusation and the claim of victory over bad loans are in order.
Firstly, if the PM wants to prove beyond doubt that his government is defusing the NPA landmine, he should ensure that the high-level empowered committee on resolution of stressed assets does not ask the RBI to give any exemptions to the power sector or any sector from the application of the February 12 circular. Indeed, not just the high-level committee but no ministry or minister should be allowed to ask for exemptions  from the February 12 circular.
Secondly, if he is serious about “defusing” the NPA landmine in the country, he and his ministers need to do some hard work in the power sector.  Power companies have become NPAs because state owned power distribution companies don’t have money to buy more power, and these discoms don’t have money because many states still suffer 10-25 percent power thefts, euphemistically called AT&C(aggregate transmission and commercial) losses.
The PM knows the drill. He succeeded in making the discom of his own state Gujarat get an investment grade from rating agencies because he did the hard work of reducing power theft and raising tariffs when justified by fuel costs.
His power ministry needs to spend time not in the high powered panel in Delhi but in state capitals, meeting state power ministers and secretaries, redlining the substations where power theft is maximum and incentivising the states to put in high tech cables and equipment that prevent theft.
His coal and railway  ministries need to work much harder to ensure that more coal is made available at the right time in the most optimum routes to fuel starved power plants. There is nothing new that the high level committee can discover in terms of answers to the power mess. The answers are known. Work on them ought have begun in 2014 when the government took office. Even now, in its fifth year, the correct answers remain the same and the wrongest answer is to ask the Reserve Bank to change its excellent circular.
Now for the charge that the NPAs were created by the UPA thanks to its phone-a-loan scam. There is no denying the UPA government has way too many scams to answer for. But it will be too facile to say all the NPA mess was caused by politicians. If we accept such over simplifications we will never find the right fixes. One big cause of the NPA mess is that the entire banking culture in the country degenerated. Bankers knowingly approved gold plating of capital costs; they knowingly signed on loans to business groups which these businessmen put in as their equity in other group projects. Which means in many cases promoters equity was zero. Some bankers did this for bribes or because of phone calls but not all. Many did it because this had become the accepted way of doing business.
More than errors of commission are the errors of omission by bankers. In innumerable cases, including after the NDA came to power, big groups have demerged the healthier part of their stressed companies and listed them separately so that when push came to shove, their performing companies won’t be hurt. We hardly ever hear of bankers protesting such demergers. Didn’t they put in covenants to prevent asset stripping of the companies they lent to? Or are they not enforcing these covenants? The degeneration of the lending culture is not just a UPA or NDA thing. It’s a problem that needs to be addressed.
It is this degeneration in banking standards that RBI has been trying to fix in the past few years. The central bank clearly woke up to the problem a little late, but since 2015, it has been unrelenting. First it created the Central Repository of Information on Large Credits(CRILC) database. Then it launched its asset quality review, forcing banks to classify as NPAs a bunch of high profile dodgy loans. Then , after the passing of the insolvency code, it marched 40 large defaulters to the NCLT and finally it came with the game-changing circular in February, which pushes the next 70 largest  defaulters to the insolvency courts.
In fact the PM could well have buttressed his claim of defusing the NPA landmine by publicly congratulating the RBI governor for devoting his second year in office to cleaning up the banking system. Despite the highest pressure from parliamentarians, ministries and businessmen, governor Patel has stoutly refused relaxations to his February circular.
As the governor completes his second year in office this week, a fitting gift from the PM could be to acknowledge what governor Urjit Patel demanded and what the Nayak committee recommended years ago- scrap the Banking Companies Act and bring PSU banks under the Companies Act so that both the governance and regulation of PSU banks is with RBI, like it is in the case of private sector banks.
Yes, it is too late in this term to bring such a seminal legislative change, but the PM can still publicly agree to implement this legitimate demand of the governor if he returns to office. That will  prove  his claim  of “defusing” the NPA landmine beyond all doubt .
next story

Market Movers

Currency

CompanyPriceChng%Chng