Assocham suggests empowered SPV to deal with NPAs

The government should empower the boards of public sector banks and set up a special purpose vehicle to exclusively deal with bad assets in order to contain non-performing assets of banks, industry body Assocham has said.

The formation of a special purpose vehicle, which will be outside the purview of statutory insights by the state auditor, intelligence agencies or the vigilance commission, will help banks follow broad guidelines prescribed for lenders and take "haircuts" and cut losses in sectors in distress without the fear of punitive action at  later date.

The special purpose vehicle so created should be freed from the 3Cs - CAG, Central Vigilance Commission and CBI -Assocham said in a release.

The twin exercise of empowering the boards of the PSU banks and formation of an SPV, which may be called 'Asset Revival Bank' (ARB) should be implemented without further delays, instilling confidence in the bankers to take decisions about restructuring the loans to sectors such as steel, construction, power etc, Assocham said.

While the SPV would set the rules of the game, the bank boards should be given powers to decide on the quantum of the waiver of compounding of interests, which has led to some of the bad loans to many times over the principal amount.

"The new institution has been tried in China which has been managing the problem at a much higher scale," Assocham secretary-general D S Rawat said.

He said the ARB should be structured in a manner so it can be kept outside the purview of the 3Cs which can otherwise create, or have rather already created, enough fears among professional bankers not to take even routine decisions of sanctioning fresh loans. "So far as taking a call on the NPAs or writing them off or cleaning the balance sheets are concerned, these have become a clear no-no because of the fear of being hounded even after retirement".

The Assocham said in a growing economy where the total loan portfolio or the book size of the banks needs to grow, writing off Rs12,000 -14,000 crore bad loan a year should not raise eye-brows and be treated as part of a normal business risks. "This is surely not to suggest to let go wilful defaulters or fraudsters, though much more clarity is needed as to who qualifies to be a wilful defaulter", the chamber said.

This is essentially what China did when its government-owned banks were saddled with some $400 billion in bad debt during the 2000s.

On account of fear or reprisals, the banks are not prepared to support any company declared NPA. NPAs are untouchables and banks are eager to get rid of them. It is very important that RBI quickly provides a suitable mechanism to revive the industry by incentivising the banks to deal with the NPAs in an effective manner.

Businesses, which have gone bad due to economic slowdown need hand holding. It could be in term of restructuring loans or interest rate moratorium that will help them sustain the bad phase and once there is uptick they will be able to pay loan back.