The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Jagruti Jain, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
The Reserve Bank of India (RBI) has offered some respite to state-owned banks drowning in bad debt. Of a list of 150 overleveraged companies, the RBI has knocked off around 20 which have sold assets and reduced their debt. So, lenders will have to put aside less cash to cover bad debt. Their March quarter numbers might look slightly better than the December quarter, when Bank of India, IDBI Bank and Bank of Baroda notched up losses of Rs 1,505 crore, Rs 2,183 crore and Rs 3,342 crore, respectively. Analysts, who predicted a near-90% crash in the profits of state-owned banks, might breathe a little easier.
Reports say the RBI has given these 20-odd companies more breathing room because their stakeholders have sold some assets to repay debt. But the RBI’s generosity is a bandage, not a cure for the afflictions of the country’s banking system. Estimates of bad loans run into lakhs of crore rupees. Some, but not all, resulted from collusion and graft between borrower and lender. Governor Raghuram Rajan recently said some loans turned bad because projects once thought feasible ran into regulatory or other hurdles. We need a new bankruptcy code, to facilitate liquidation or transfer of ownership of indebted companies. This will need legislation, and could take time.
Meanwhile, asset reconstruction companies (ARCs) should take over distressed companies from banks at a discount and convert debt to equity. ARCs can try and turn them around, or sell them on to prospective buyers or liquidate assets. After Vijay Mallya episode, many banks have turned risk-averse and might not want to incur regulatory wrath by selling off assets to new promoters at a discount. Having ARCs as intermediaries could offer them some comfort.