These questions are keeping RBI Deputy Governor Viral Acharya awake at night

Indian banks urgently need a powerful plan like a “Sudarshan Chakra” to restore the health of public sector banks within months if not weeks, Reserve Bank of India Deputy Governor Viral Acharya said on Thursday.

Speaking at the 8th RK Talwar Memorial Lecture, Acharya said there were several options being worked out by the government and the RBI such as the Indradhanush plan of 2015 for capitalisation of public sector banks, the government’s divestment programme, Insolvency and Bankruptcy Code, RBI’s structural resolution mechanisms and the recent Alternative Mechanism approved by the Cabinet.

Acharya was worried, however about the pace at which these plans were being implemented and said there was a pressing need to implement many of the options and work them out together at a hurried pace.

He raised questions over the possibility of selling off valuable deposit-heavy public sector banks to private players, if government stake can be reduced to 52 percent at one go and publicly give more clarity to investors without any further delay.

From the central bank’s side, Acharya said, “Going forward, the Reserve Bank hopes that banks utilise the IBC (Insolvency and Bankruptcy Code) extensively and file for insolvency proceedings on their own without waiting for regulatory directions. Ideally, in line with international best practice, out-of-court restructuring may be the right medicine at ‘pre-default’ stage, as soon as the first signs of incipient stress are evident or when covenants in bank loans are tripped by the borrowers.”

After quoting two stanzas from Henry Wadsworth Longfellow’s poem The Psalm of Life, Acharya said this was the most important unfinished agenda in the banking sector but there is “lack of a clear and concrete plan for restoring public sector bank health”.

Acharya drew parallels from the banking sector stress in Japan and Europe but said India can be better off with a lower per-capita GDP than these countries.

RBI has created the Central Repository of Information on Large Credits (CRILC), ended forbearance to not mask non-performing asset (NPA) problem, completed an asset quality review, directed banks to file insolvency applications against 12 large accounts comprising about 25 percent of the total NPAs, among other steps.

The central bank has also advised banks to make higher provisions for these accounts to be referred under the IBC to ensure that banks are fully protected against likely losses in the resolution process. This would make it possible to minimize the banks’ balance-sheet impacts.

With capital constraints and NPAs worth more than Rs 8 lakh crore, (about 10 percent) of the total banking system, Acharya said a critical intervention is necessary to address this balance-sheet malaise.

Acharya raised several questions:

Having embarked on the NPA resolution process, indeed having catalysed the likely haircuts on banks, can we delay the bank resolution process any further?

Can we articulate a feasible plan to address the massive recapitalisation need of banks and publicly announce this plan to provide clarity to investors and restore confidence in the markets about our banking system?

Why aren’t the bank board approvals of public capital raising leading to immediate equity issuances at a time when liquidity chasing stock markets is plentiful?

What are the bank chairmen waiting for, the elusive improvement in market-to-book which will happen only with a better capital structure and could get impaired by further growth shocks to the economy in the meantime?

Can the government divest its stakes in public sector banks right away, to 52 percent? And, for banks whose losses are so large that divestment to 52 percent won’t suffice, how do we tackle the issue?

Can the valuable and sizable deposit franchises be sold off to private capital providers so that they can operate as healthy entities rather than be in the intensive care unit under the Reserve Bank’s Prompt Corrective Action (PCA)?

Can we start with the relatively smaller banks under PCA as test cases for a decisive overhaul?

Acharya said, “These questions keep me awake at night. I fear time is running out. I worry for the small scale industries that Mr Talwar (former State Bank of India Chairman) cared the most about, which are reliant on relationship-based bank credit.

“The Indradhanush was a good plan, but to end the Indian story differently, we need soon a much more powerful plan – “Sudarshan Chakra” – aimed at swiftly, within months if not weeks, for restoring public sector bank health, in current ownership structure or otherwise,” he added.