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At the Public Expense

Why should the financial distress of the private corporate sector be borne by the public sector?

The Banking Regulation (Amendment) Ordinance, 2017, promulgated on 4 May 2017, amends the Banking Regulation Act, 1949 to authorise the Reserve Bank of India (RBI) to direct banking companies to initiate insolvency resolution processes with respect to defaults, under the provisions of the Insolvency and Bankruptcy Code, 2016. Additionally, the RBI may “from time to time, issue directions to banking companies for resolution of stressed assets,” and may appoint committees to advise banking companies. It remains unclear what this ordinance seeks to achieve, given that the RBI already has oversight over banking operations, and can issue directions to banks with the powers already vested in it by the Banking Regulation Act, 1949. It remains to be seen whether this amendment will result in a faster resolution of stressed assets. The government and its functionaries, nevertheless, continue to suggest measures that seek to find quick fixes to the stressed assets problem. Essentially, these solutions seek to force ways to ensure that the costs of private-sector loan defaults are borne by the state and its enterprises.

Various measures have been suggested in the recent past. The Economic Survey proposed the creation of a Public Sector Asset Rehabilitation Agency (PARA) which would purchase the bad loans from the public sector banks (PSBs). The proposed PARA would be financed from three sources: the issue of government securities, equity shareholding by private investors, and money from the RBI’s surpluses. Like the PARA, the other proposed solutions to the stressed assets problem also rely on state financing to clean the financially-distressed banks’ balance sheets. What is worse is a reported meeting (in the presence of the Prime Minister) at which it was proposed that the public sector undertakings (PSUs) be “coaxed” to purchase the non-performing assets (NPAs) of the banks’ private corporate sector (PCS) loan defaulters. To conjecture, in effect, such a transfer of stressed assets to non-banking PSUs will not attract the level of scrutiny that PSBs dealing with the PCS debtors would. The PCS debtors would sell their bad assets and pass on the corresponding liabilities to the PSUs, in turn, rendering the cash-rich PSUs financially distressed. Why not instead just recapitalise the PSBs and hold the PCS defaulters to account?

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Updated On : 27th Aug, 2017

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