The Great Indian Banking Cleanup?

Tamal Bandyopadhyay has an outstanding chronicle of India's banking sector saga. What stands out is the progressive evolution and tightening of the process of recognition, 

the banks have been directed to do many things—ranging from integrating the core banking system with SWIFT to checking all bad loans worth Rs50 crore and more for possible frauds to consolidating their foreign operations, among others—to get their house in order... (under) the 12-February midnight directive of RBI... all existing frameworks for addressing stressed assets have been withdrawn and the joint lenders’ forum (JLF), an institutional mechanism that was overseeing them, has been dismantled. Now, the banks have no choice but to classify all large loans worth at least Rs2,000 crore as non-performing assets (NPAs) immediately when they restructure it. The clock started ticking from 1 March 2018. Such an NPA should be resolved within 180 days, failing which the account gets referred to the Insolvency and Bankruptcy Code (IBC) court. Simply put, when a borrower fails to pay a bank loan in time, it becomes a defaulter, unlike in the past when the account was classified as “stressed” – often an excuse for the banks to postpone the inevitable...

The war against NPAs started with the so-called asset quality review, or AQR, in the second half of 2015 under which RBI inspectors checked the books of all banks and identified bad assets. Bankers were directed to come clean and provide for all bad assets by March 2017. On top of that, the central bank started forcing banks to disclose the divergence between RBI’s assessment of the loan books and the banks’ recognition of bad assets in the notes to accounts to their annual financial statements to depict “a true and fair view of the financial position” of each bank. An ordinance was promulgated in 2017, amending the Banking Regulation Act, 1949, giving powers to the central bank to push the banks hard to deal with bad assets. It authorized RBI to direct the banks to invoke the IBC against the loan defaulters... Also, from now on, banks need to report all default cases involving at least Rs5 crore every week (at the close of business hours every Friday) to a central repository of information.

When you step back and see the banking sector cleanup that is being played out, assisted by the Bankruptcy Code, you cannot but not feel that this is perhaps a paradigm shift in India's banking sector - it beggars my belief as to why the regulator did not even have the basic reporting requirements on the different types of stressed assets till recently. If our banking regulation stood on such shaky foundations, what confidence can we have about the other, arguably less competent and more compromised, regulators being able to effectively regulate the capital and other financial markets?

Anyways, this is one massive achievement for this government. Maybe, when the history books are written, this would count as 2-3 of the biggest achievements of the government. It should shout from the roof tops and I would not mind...

After all, the muck within the banking system - the ever-greening, gold-plating of loans, the diversion to other purposes, political cronyism in loan advances etc - were well known to insiders for long, and could have been addressed by previous governments too. I believe the regulator would have resisted excessive reporting and disclosures, transparency and intervention (like breaking the distinction between restructuring and NPA and aggressive provisioning requirements) arguing that it would shake the confidence in the banking system. And the government, like the Bootlegger to the RBI's Baptist, would have happily acceded. Is there something this government had going differently - its anti-corruption commitment, arrival of IBC etc? 

For sure several things can (and likely will) still slow down the process - banker's becoming risk averse thereby slowing down lending; the IBC led resolution process getting stuck in a few high profile corruption scandals; the capital markets not being able to absorb the deluge of assets hitting the market; the courts intervening to slowdown the process, and so on. But that would be par for the course with such transformational changes. It cannot detract from the achievements till date. 

It would be great to hear someone, preferably an insider, write the story of the evolution of the Great Indian Banking Cleanup - how much of it was government's and how much RBI's contribution; how much despite the government and how much despite the RBI; how much role did specific individuals - in govt and RBI - play; how were the corporate vested interests overcome; were the consequences of each step of tightening oversight discussed in detail and how did a risk-averse system pull itself to bite the bullet at each stage; how much of the clean-up momentum owed to initiatives like the anti-corruption drive and the demonetisation; how much of the momentum owed to the public pressures from high-profile cases like Vijay Mallaya and now Nirav Modi; how much of it was shaped by various other less known opportunistic shifts and how much part of conscious comprehensive planning; is there a path dependency associated with where we are now - should we have necessarily done CDR, S4A, SDR, AQR, breaking the distinction between restructuring and NPA etc before going for broke with blanket disclosure and transparency...

I am sure this would be one hell of a chronicle of how public policy is made emerges.