Long shadow: Post-moratorium debt restructuring
The moratorium on loans to businesses and retail borrowers in financial stress after the outbreak of the pandemic draws to a close by the end of the month. With still no indication of when the crisis will blow over, the policymakers at the Reserve Bank of India have thrown open a new window for debt resolution that ostensibly gives banks the sole discretion to pick borrowers who will be granted a longer runway to pay back their loans. The broad idea that underpins the proposed debt restructuring programme is to ensure that firms, with an otherwise good track record under the existing management, do not get pitchforked into a crisis that could unnecessarily jeopardize the recovery process. The governor, Shaktikanta Das, has said that banks can start the process of sifting through their databases to identify the firms and individuals who will qualify under the new dispensation. The policymakers had formed a committee under the eminent banker, K.V. Kamath, to suggest a set of financial parameters that should be factored into resolution plans. Banks have been asked to adopt a board resolution relating to the new debt recast programme and start implementing it without waiting for the Kamath Committee report or the central bank notification, which is expected by September 6.
But niggling doubts remain. Public sector banks, which, empirical evidence shows, usually have the largest exposures to stressed borrowers, have never really been completely free from interference while taking commercial decisions. The process does provide for an inter-creditor agreement among lenders before signing off on a resolution plan. But the fidelity of collective decision-making can be subverted. In order to invoke a resolution plan, only 75 per cent of the lenders by value of the outstanding credit and representing just 60 per cent of the lending institutions by number need to agree. Cherry picking of borrowers — they will get the benefit of an extended two-year runway to resolution with the added advantage of a debt moratorium of up to 12 months — could undermine the integrity of the process with the enormous risk of a pile up of bad loans in the end.
Until the Insolvency and Bankruptcy Code was adopted, the banks had a variety of debt resolution mechanisms in place. Many of them did not work but there were no real infirmities in the procedures. The problem was with the enforcement of the guiding principles. The system will work only if there is no government interference in banking decisions. This harks back to the wisdom of the good governance practices suggested by the P.J. Nayak Committee in its May 2014 report. The panel had suggested that the government should cease to issue any instructions to banks under the guise of development objectives. Perhaps it is time to introduce that major structural reform first to witness real success on the ground.