Newly appointed Reserve Bank of India deputy governor Viral Acharya, in his maiden speech after taking charge, came down heavily on the way lenders approached the problem of bad loans and set a timeline to resolve the issue.
For resolution of stressed assets, he suggested a private Asset Management Company (PAMC), which would be suitable for sectors where the stress is such that assets are likely to have economic value in the short-run, with moderate levels of debt forgiveness. Some of the sectors seeing heavy stress are metals, telecom, and textiles.
“In terms of timeline, the banking sector will be asked to resolve and restructure, say its 50 largest stressed exposures in these sectors, by December 31, 2017. The rest can follow a similar plan in six months thereafter,” he said at a function organised by the Indian Banks’ Association here.
Possibly a sixth of public sector banks’ gross advances are stressed, and a significant majority of these are in fact non-performing assets (NPAs), he said. For banks in the worst shape, the share of assets under stress has approached or exceeded 20%.
“The doubling of stressed assets is the case also for private sector banks, but their ratio of stressed assets to gross advances is far lower and their capitalization levels far greater, he said.
NAMC model
The other model he suggested is that of a National Asset Management Company (NAMC)”, which would be necessary for sectors where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short- to medium-term.
“It is going to require being balanced and creative, holistic and uncompromising, in achieving the end goal. Piece by piece approach with all discretion given to banks simply hasn’t worked. Time is of the essence if we are to restore corporate investment and job creation,” he said.
Mr. Acharya said the government should not foot all losses of the banks. Many banks suffered heavy losses in recent quarters as bad loans zoomed. He suggested ‘surgical restructuring’ to strengthen bank balance sheet.
“As a majority shareholder of public sector banks, the government runs the risk of ending up paying for it all…Some surgical restructuring should be undertaken to consolidate and strengthen bank balance-sheets so that private capital will come in at better valuations,” he said.
Disinvestment
He said some banks should be allowed to shrink and that disinvestment should also be an option.
Mr. Acharya said the banking system will be better off if there are fewer but healthier public sector banks.
