Vishwanathan’s address staked out the position of the central bank on this and other issues, some of them in apparent contrast with the government’s views, and followed comments by fellow deputy governor Viral Acharya on October 26 that had sparked a swift retort from the finance minister.
“Banks are not supposed to be shock absorbers of first resort of the difficulties faced by their borrowers as banks do not have the luxury of delaying payments to their depositors,” Vishwanathan said in his October 29 speech in Jamshedpur that was posted on the RBI website late on Friday. His comments come against the backdrop of non-banking finance companies (NBFCs), in the grip of a liquidity squeeze seeking a rescue from banks. This is one of the issues on which the government is said to differ with RBI, which is opposed to a proposed special liquidity window for NBFCs.
Vishwanathan also defended RBI’s February 12 circular, which tightened loan-recognition norms and scrapped all existing debt-restructuring schemes for large borrowers since the Insolvency and Bankruptcy Code (IBC) had been put in place.
Of course, a bank can renegotiate terms of a loan if circumstances warrant, but this must be for a good reason and the bank should recognise the consequent risks,” Vishwanathan said. “This renegotiation of terms should be an exception rather than the rule, as resorting to it often would endanger the safety of deposits, dent a bank’s ability to lend further and imperil its existence as an intermediating entity.”
There had been a demand from the power sector for special dispensation in restructuring existing debt, a position that the government had backed in court.
“Next time we hear about a bank making efforts to recover loans from borrowers, we should all note to remember it is essentially trying to get back the depositors’ money,” the deputy governor said.
The most important objective of the central bank’s Revised Framework for Resolution of Stressed Assets is to alter the balance of power in favour of creditors, something which had been in favour of debtors for long time, he said.
“The out-of-court restructuring mechanisms too suffered high failure rates resulting in the borrowing entities continuing to indulge in repeated defaults, being confident the balance of power remained with them and the ability of banks to discipline errant borrowers was weak,” the deputy governor said, explaining why the IBC process was necessary.
In the case of wilful or strategic defaulters, who can pay but won’t do so a change in ownership accompanied by “punitive action against the defaulting management is the way to go”, he said.
“The Indian banking system has a high proportion of un-provided NPAs vis-àvis the capital levels. As I said, there are signs of improvement in the default rates and recovery rates after IBC and RBI’s Revised Framework, which may result in lower unexpected losses for banks in the future,” Vishwanathan said. “However, a recalibration of risk-weights or minimum capital requirements would need to wait till these trends are firmly entrenched in the economy. Frontloading of regulatory relaxations before the structural reforms fully set in could be detrimental to the interests of the economy.”
He said that resolution plans offered by existing managements were less valuable than they seemed. “The choice before banks is: ‘illusory future payments’ vs ‘upfront real cash’. Banks need to arrive at the present value of ‘illusory future payments’ by discounting it for time value of money and more importantly for the uncertainty in receiving the payments taking into account the existing management’s past records,” he said.
He also spoke about RBI insisting on stricter standards than Basel norms, referring to complaints that capital requirements for banks are unnecessarily high at 9% rather than 8% under the international guideline. “Regulatory capital is meant to serve as a buffer against unexpected loss,” he said.
“The suggestion by some that our capital requirements are more onerous than international standards is not correct at all. As the need for repeated recapitalisation has proved, banks in India need to aspire to have higher capital levels.”
He also said that higher CRAR doesn’t necessarily squeeze credit growth but raises hygiene.
“It may be noticed that in the past, high levels of credit growth due to ‘supply push’ have resulted in high corporate leverage and consequent NPAs in the banking system,” the deputy governor said. “We must guard against any push for dilution of standards in the name of aligning them with international benchmarks because that will be cherry-picking and will result in our banks being strong in a make-believe sense and not in reality,” Vishwanathan said. “It is by resisting such temptations, I believe, we will build a financial system that is lot stronger than today.”
As the insolvency and bankruptcy regime matures, debt recovery and asset quality will get closer to global standards, he said. “Then our probability of default and loss given default will also come down to global levels. Hopefully, those days are nearer than we think,” the deputy governor said.