Red Tape, Judicial Delays Hurting NPA Resolution, Says Nobel Winner Robert Engle

American economist and Noble laureate Robert Engle on Tuesday said red tape and endless judicial processes make it difficult for banks to deal with the bad loans problem.

However, he lauded the Reserve Bank of India for pushing bankruptcy reforms to increase the speed and fairness of the resolution processes and also forced lenders to send defaulting borrowers to bankruptcy courts.

“But excessive red tape and interminable judicial schedules make it difficult for banks to deal with non- performing loans,” Engle said delivering the RH Patil memorial lecture organised by the NSE.

Referring to the Essar Steel case, he said the courts blocked restructuring of the company, striking a body blow against the bankruptcy reforms.

However, in recent Supreme Court judgement rejecting the NCLAT ruling is a welcome change.

“Much remains to be done to reduce the backlog of non-performing loans,” he said.

The Economics Noble was awarded to him along with Clive Granger in 2003 for their research on the concept of autoregressive conditional heteroskedasticity and for inventing methods to analyse economic time series with time-varying volatility.

A trained statistician, he currently is the director of the NYU Stern Volatility Institute and is the co-founding president of the Society for Financial Econometrics, a global non-profit housed at the New York University.

He said modern bankruptcy laws are like a “hospital for distressed companies. They get relief from debt and a chance to reorganise. If they are successful, they can emerge as new health competition.”

He said rather than rollover existing loans, it is often better to make new more profitable loans and let the old loans default. “There is a recovery value which may exceed the costs of extending new credit.”

From a social point of view, it is sensible to close unproductive businesses and support new better firms with lots of growth potential and employment opportunities, he said.

Engle further said in economies such as India’s and China’s, where many financial institutions are state- owned, pressure for an undercapitalised institution to deleverage, is reduced as it can expect financial help in a downturn.

However, an under-capitalised state-owned financial firm will be reluctant to make new loans which would expand the asset base and increase the possibility of needing more capital and appearing incompetent in managing money and risk, he said.

NSE managing director Vikram Limaye said to achieve sustainable high growth, it is critical to expedite market development and capital formation and noted that though the equity market is relatively well developed, penetration is still low relative to emerging market averages.