A crucial step to get economy going

A crucial step to get economy going

The Cabinet has done well to move on the bad loan burden of banks, which has been throttling credit growth. The core of the reform proposal reportedly is appointment by the Reserve Bank of India of an oversight committee that would shield bankers from individual accountability for decisions and also give directions to banks to take action against defaulters under the bankruptcy code.
This makes sense. Restructuring of loans will involve banks taking significant haircuts in many cases, to clean up their books. Senior management involved in decision-making must have an assurance that such haircuts would not put them in the crosshairs of agencies such as the Central Bureau of Investigation and the Enforcement Directorate.
No one wants to follow in the footsteps of the former chairman of IDBI Bank, whom the CBI arrested for the bank’s loans to Kingfisher Airlines.
Any credit decision entails judgement of risk and all wrong calls are not mala fide. Similarly, all haircuts are not handouts to corporate bosses. So, when a committee of wise men determines the fairness of haircuts, it would take the pressure off individual bankers.
The total stressed assets — gross non-performing assets and restructured standard advances — are estimated at a staggering Rs9.64 lakh crore as of December 2016. These bad loans must be resolved, directly by the banks or by asset reconstruction companies that buy them off the banks. The bankruptcy code and the resolution professionals it brings into being must be put to use. Cleaning up the banks’ books would help ease credit flow to business and revive investment and growth.
Two additional points remain. Bankers’ remuneration must change, to align with the performance of the assets they originate. This calls for short-, medium- and longterm variable pay to be a much larger chunk of their total remuneration, which itself should rise in line with what the market pays for such skills in other business segments.
The second point is about the Ordinance route to the reform. The government should engage the Opposition to formally amend the law, ideally.