Rajan’s NPA schemes may get quiet burial; Patel hints at new debt resolution framework

MUMBAI,MANJU AB : Inflation has flown out of the Reserve Bank of India (RBI)’s top agenda as Urjit Patel, its new governor, unveiled his maiden credit policy that would make both the growth-focused government and companies happy.

Departing from his predecessor Raghuram Rajan, who guarded inflation as a long-run challenge, the 52-year-old Kenyan-born RBI chief has moved in to push government’s economic growth agenda, banking on the new bankruptcy law to resolve stressed assets.

It looks India is entering a new period of monetary policy. Monetary hawkishness is being sidelined as India sees an opportunity to push for growth in a slow-growing world. Several bankers believe there will be further rate cuts, including another one in December, to push the growth agenda.

It is not just the inflation target that Patel has relaxed. He also seems determined to chart out another course for banks to resolve their sticky loan situation. He seems to believe that however bad the non-performing asset (NPA) situation is, credit lines should not be choked to the industry.

In his brief address to the press on Tuesday, Patel said, “The NPA situation is an important issue for the RBI in India. We will be dealing with it with firmness but also with pragmatism so that the economy does not feel any lack of credit.”

Patel made no mention of the asset quality review (AQR) and the deadline of March 2017 by when banks have to clean up their balance sheets. Instead, he hinted at a new framework to work out a solution.

Indications are that Rajan’s three flagship programmes to tackle bad debt would be tossed out or revamped to suit the interest of stressed companies. Under the strategic debt restructuring (SDR), banks were asked to change errant borrowers with new management within a timeframe of 18 months, while banks could refinance loans every five or seven years under 5/25 scheme. Under the third debt resolution programme — Scheme for Sustainable Structuring of Stressed Assets (S4A), the debt of companies was allowed to be divided into two parts — sustainable and unsustainable, with the first part to be serviced by the company and the other to be converted into equity.

On the S4A, Patel gave a breather allowing banks to classify the sustainable part as standard assets which is expected to bail out many companies.

Total stressed assets which included restructured debt and non-performing loans of banks were 11.5% of Rs 75 lakh crore outstanding loans at the end of March 2016. Patel said 61% of this came from five sectors — infrastructure, steel, textiles, power and telecom.

A senior banker said, “It is most likely that he will come up with his own set of rules to resolve the NPA issue in consultation with the government. It seemed as if he believed that the AQR exercise and restructuring schemes like the stressed debt restructuring schemes were stifling credit to industry.”

Unlike his predecessor, he did not make any shrill calls to industry to repay the loans. He, instead said, “NPA situation has not occurred overnight and they will require skill and thoughtful approach to resolve the issue.”

The AQR exercise undertaken by the RBI in the middle of last year saw many skeletons tumble out of the cupboard of banks — both private and public sectors. It had led to banks reporting a loss of Rs 20,000 crore in profits in the last two quarters of the 2015-16. Large borrowers were asked to pay back or banks were asked to change the management under the SDR.

Patel is a man of few words and one has to read between the lines to understand his rationale. The shortest press conference he held after unveiling the monetary policy has earned him the nickname ‘Urgent Patel’ as he rushed out of the conference room without even completing the scheduled time of half an hour allotted for the conference.