IDRCL: Incentives and transparency, not RBI

State-owned banks reportedly want the Reserve Bank of India (RBI) to regulate India Debt Resolution Company Ltd (IDRCL), the entity that will resolve the stressed assets acquired by the bad bank. Of course, banks may be keen to play it safe, by claiming the banking regulator’s implicit approval for resolutions by IDRCL. However, there is no need for any RBI oversight of IDRCL. RBI-regulated asset reconstruction companies (ARC) have not quite been stellar successes of resolution of bad loans. The point of creating a separate company to resolve bad loans is to give it greater operational freedom.

Private sector institutions would hold 51% equity in IDRCL, giving it the flexibility to employ professional management teams to run companies that can be salvaged, turn them around and sell them off and to liquidate companies that cannot be salvaged, without being hounded by enforcement agencies. Public sector banks have a majority shareholding in the bad bank (read: the National Asset Reconstruction Company Ltd, or NARCL), that would buy the bad loans from commercial banks. So, the relationship is between the bad bank and the resolution entity. A company does not operate in a legal vacuum and there is no reason to hobble the resolution entity. The new model must be given a chance to succeed. There is no reason for a repeat of the RBI short-circuiting UV Asset Reconstruction Co Ltd’s proposed purchase of the assets of the bankrupt telecom operator Aircel Group.

RBI oversight is no guarantee against malpractice: public as well as private banks have witnessed assorted scams and swindles. RBI oversight of IDRCL is neither necessary nor sufficient for smooth resolution of bad loans. Transparency of process and incentives for performance would do a better job.


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