The NPA problem: 'There is no silver bullet'

Resolution to the bad loans problem has to be incremental, and the RBI has to ensure NPAs are not swept under the carpet, HDFC chairman Deepak Parekh tells Joydeep Ghosh.

Illustration: Dominic Xavier/Rediff.com

The banking sector is expected to see a lot of action after the government's initiative to tackle the non-performing asset (NPA) problem through the NPA Ordinance.

Deepak Parekh, chairman, Housing Development Finance Corporation, says that the Reserve Bank of India (RBI) is not overextending its reach as a regulator nor is it being expected to take commercial decisions. As the banking regulator, its job is to ensure stability in the system.

• In graphs: The grim story of India's bad loans

Is the NPA Ordinance a silver bullet or just an incremental measure?

Much as one would wish, there is no silver bullet. Resolution has to be incremental, but the important point is that among the RBI, the finance ministry and the Prime Minister's Office, enabling resolution of non-performing loans of banks is being accorded top priority.

That said, there is no overnight, magic wand solution.

Amendments to the Banking Regulation Act have brought alignment with the Insolvency and Bankruptcy Code, 2016. The regulatory framework now allows for the central bank to direct banks to initiate insolvency resolution under the Bankruptcy Code.

The ordinance helps the RBI to prod banks to seek resolution rather than maintaining the status quo.

While we have to wait for directions from the RBI, the difference is that it has legal standing to ensure banks take necessary action. In return (though still not explicitly stated), banks will receive a so-called shield from vigilance agencies.

Are banks giving up their autonomy?

It is the banks that will still continue to drive resolution.

It is a pointless debate over whether banks are giving up their autonomy or whether the RBI or the government will be micro-managing the situation. The RBI is certainly not overextending its reach as a regulator, nor is it being expected to take commercial decisions. It is the job of the regulator to ensure stability in the system.

The world over, central banks and governments intervene in extraordinary circumstances. The banking system cannot afford to a paralysis over resolution of NPAs.

The Joint Lenders' Forum (JLF) was facing problems because all banks were often not on the same page. Does this solve that problem?

The JLF was not able to take the process to its logical conclusion. Consensus building and getting everyone on board was proving to be difficult.

Then there were roadblocks like getting all banks' board approvals, and adding to that problem were instances where some banks had been left headless or were simply reluctant to go ahead with any decision for fear of ramifications.

There has been a lot of ground work done at the JLF in some cases. The amendments that the RBI made, in terms of reducing the thresholds to facilitate decisions and allowing bank boards to empower their executives to implement plans, get rid of a lot of the practical hindrances.

Much will now depend on how the oversight committees will be constituted and how many such committees will be formed. Realistically, the mandate of the oversight committees must be to deliver solutions; it's pointless having more advisory committees.

There are fears that if the RBI aggressively pushes to resolve NPAs, it could lead to more bad assets. Do you think the RBI should go slow?

The RBI was aggressive on the asset quality review (AQR) and its push towards accelerated provisioning. With the benefit of hindsight, it was the right decision as the AQR brought out the extent of toxic assets in the system.

Where the central bank needs to firmly stand its ground is putting an end to the practice of sweeping NPAs under the carpet. This, above all, is an issue of governance.

The increase in bad loan accretion should start tapering, and there seems to be consensus that most banks are now nearing the end of recognising NPAs.

The NPA problem is not endemic, bulk of the NPAs are concentrated in 4 or 5 sectors and the large ones are across 50 odd accounts. Each of these accounts will need to be looked at on a case-by-case basis as different solutions will be needed for each case.

I do not think the RBI will drive the pace of change. It must be left to the banks to do so.

There have also been talks of a bad (loans) bank/s. Your thoughts?

A number of options were discussed ranging from a bad bank, creation of a large asset reconstruction company for public sector banks, culling out non-performing loans sector-wise and other such options. Many countries have quite successfully adopted the bad bank model to clean up the banks' books.

The authorities have conveyed that at this juncture it is more important to seek resolution of NPAs rather than attempting to create a new institution. Just warehousing bad loans in a bad bank will not by itself solve the problem.

Creating a new institution is time-consuming. It would have, then, led to a much wider debate on whether it should be majority held by the public or private sector.

If the government had put in capital, critics would have charged that it would be akin to shifting funds from one arm of the government to another. If it was the private sector, then the haircut taken by banks would have been larger.

So, while various options must continue to be explored, in terms of priority, tackling resolution directly at least ensures the deadlock on NPAs is not prolonged.

Another important development that has happened recently is the introduction of Real Estate (Regulation and Development) Act, 2016 (Rera). However, some states seem to be diluting the model bill. Will the dilution cause more confusion and defeat the purpose?

Land is a state subject. Each state has their own rules and regulations so the manner and pace with which Rera will get implemented in each state will differ. This is to be expected.

I personally think it is too early in the day to draw conclusions on whether some states are deliberately watering down the provisions of the central government act.

At the same time, it is a welcome step to see louder voices of consumer activism. One has to give the benefit of doubt that some states may have made amendments in their rules keeping in mind ground realities and ensuring implementation is pragmatic and practical.

How will the consumer benefit from this?

Rera is a confidence builder for the consumer. It will change the way the industry operates and it will bring in greater transparency.

But we have to give the system time to adjust to the new regulations.

In the initial phase, it is important for the real estate regulators to seek feedback and balance the interests of the developers and consumers.

Do you think real estate prices are likely to come down after the introduction of Rera? Some builders are saying, higher compliance costs will lead to higher prices?

I don't think Rera by itself will trigger real estate prices -- upwards or downwards. Just because the onus on developers has increased is no reason to believe that prices should move upwards.

Some developers have expressed the view that the restriction on the use of cashflows (with 70 per cent being in a separate account) would increase costs. I think this requirement will help ensure that funds don't get diverted for other purposes and that projects are completed in a time bound manner.

Developers, who are stranded with cashflow issues, have to realise that they need to offload their unsold inventories, rather than holding on believing they can get a higher price.

On a technical issue, the price per square foot may see some increase for on-going projects since the developer now needs to quote prices based on the carpet area as against the super built-up area. Since the carpet area is generally 30 to 35 per cent lower than the super built-up area, to that extent, the per square foot price in a project may see an increase. But this essentially is only a price re-adjustment and not a price increase across the sector.

The overriding factor is that transparency is being brought into the system and the home buyer is able to make better informed decisions.

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