Editorial


When:
June 11, 2018 @ 2:00 am
2018-06-11T02:00:00+05:30
2018-06-11T02:15:00+05:30
Editorial

11 JUNE 2018

No easy solutions

A ‘bad bank’ is not a magic bullet; tackling NPAs requires other structural reforms as well

Union Minister Piyush Goyal, currently in charge of the Finance Ministryhas announced the formation of a committee to assess the idea of special asset reconstruction companies or asset management companies to take over bad loans from banks. The bankers’ panel has been given two weeks to revert. The idea of a ‘bad bank’ is not new.Chief Economic Adviser Arvind Subramanian had suggested the creation of a Public Sector Asset Rehabilitation Agency (PARA) to deal with what he described as India’s “festering twin balance sheet problem. By this he meant over-leveraged corporates unable to service debt or invest afresh, and banks hit by non-performing assets (NPAs) cagey about fresh lending. This overhang hurts new investments and continues to dent India’s medium-term growth and job creation prospects. A professionally-run PARA, or the so-called ‘bad bank’, could assume custody of the largest and most difficult-to-resolve NPAs from lenders’ balance sheets. This would allow banks to focus on extending fresh credit and supporting the pick-up in growth. More importantly, a bad bank taking tough decisions on borrowers-gone-bad, it was argued, could free bankers from the risks entailed in large loan write-downs.

But there are good reasons why the Finance Ministry left the bad bank idea in the cold over the past year and a half – among them the fact that the new entity would need a lot of capital support, just as banks do. Some of this was envisaged as coming from the Reserve Bank of India through a complicated transaction. After a long debate within government, under Finance Minister Arun Jaitley, it was noted that setting up a new institution would be very time-consuming and there would be challenges on its ownership structure as well as the pricing of bad loans taken over from banks. In any case, going by the experience of private asset reconstruction companies, a PARA by itself would not be able to deploy dramatically different tools to extract better value from underlying assets and would, at best, amount to window-dressing bank books to attract investors. As former RBI Governor Raghuram Rajan had pointed out, a government-owned bad bank could still face scrutiny from the Comptroller and Auditor General and the Central Vigilance Commissioner. For now, the government is clearly under pressure to demonstrate fresh intent to investors as India Inc believes bank loans are likely to remain sluggish for the next two-three years. Whether or not the knots in the bad bank idea are sorted out, the government should focus onother reforms as well. One, amend the Prevention of Corruption Act to shield bankers and officers from investigative witch-hunts. Two, back bankers to take demonstrable action against wilful defaulters. And three, take a hard look at what ails the Insolvency and Bankruptcy Code.

 

Ceasing fire

The Taliban’s reciprocal truce against Afghan troops provides a glimmer of hope

The Taliban’s announcement of a three-day ceasefire with Afghan government troops for Eid, two days after President Ashraf Ghani declared an unconditional week-long ceasefire, is a glimmer of hope for a breakthrough in the long-struggling peace process. This is the first time the Taliban has announced a ceasefire in the 17 years since it was removed from power in Kabul. Though it has not acknowledged the government ceasefire, the timing and the public declaration unmistakably point to the reciprocity of the decision. In the past, Mr. Ghani’s government had tried several times to reach out to the Taliban to find a breakthrough in the conflict. In 2015, when both sides were in an advanced stage of talks, it was revealed that the Taliban leader Mullah Omar had died years ago, upending the whole process. In February, Mr. Ghani had invited the Taliban to shun weapons and join peace talks in return for security assurances and passports to militants. But the group shunned the offer after days of uncertainty. The surprise ceasefire declaration during Ramzan is the latest gambit by Mr. Ghani. The war has long entered a stalemate, and something needs to give. The Taliban has made enormous military gains in recent years. It now controls vast swathes of rural, mountainous Afghanistan, while the government retains its grip on the more populated urban centresThe Taliban doesn’t seem to be in a position to capture power by overthrowing the government as long as the U.S. and its allies remain committed to the regime’s security. Equally, Afghan forces are unable to defeat or even check the Taliban’s momentum in rural areas.

The fact that the government and the Taliban finally accepted a limited ceasefire suggests that the appetite for a political solution is now stronger. But a three-day Taliban ceasefire will not necessarily set the scene for a more productive engagement. The Taliban has said that the truce is applicable only to the “domestic opposition”, which means it will continue to target foreign troops. Also, the announcement came immediately after several attacks over 24 hours left at least 50 security personnel dead, which shows how precarious the situation is. Even for talks to be initiated, there are serious bottlenecks — the Taliban insists that foreign troops be withdrawn, while the government demands that the group accept the Afghan constitution. Despite these challenges, the Taliban’s positive response is a small gesture which could be used by both sides to build confidence before moving to the next step. The U.S. could put pressure on the Taliban through Pakistan to bring them to the table. If not, the war will carry on, with neither side gaining a decisive edge and leaving millions of Afghans in unending misery.

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