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Will NPA Resolution Scheme will Hail Indian Banking System?
Mon, 8 May Pre-Open

The banking sector is the pillar and plays an important role of a financial intermediary. However, banks are struggling with Non-Performing assets (NPAs) for quite some time. Stressed assets have been consistently rising over the last few years.

Because of this, banks need to set aside ever-increasing sums of money as provisions. Now, due to rising provisions, banks (particularly public sector banks) are reeling under losses. PSBs are saddled with bad loans to the tune of a staggering Rs 6 lakh crore. This means these banks are on the edge of breaching Basel-III capital adequacy norms. The end result is a slowdown in credit growth. This has become a vicious cycle.

To solve this issue, the cabinet on Wednesday cleared the NPA resolution package that includes an ordinance to empower the central bank to more effectively deal with bad assets. Currently, there is no enabling provision that allows the Reserve Bank of India to act on behalf of PSBs for resolving bad loans. With the changed law, the RBI would get more direct powers to deal with bad loans.

Reserve Bank of India is now empowered to resolve stressed assets by invoking bankruptcy code against defaulters and also set up committees on a case by case basis, or sector specific committees to decide on restructuring which also includes deciding the quantum of haircuts or one time settlements.

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Now, interference of RBI in the resolution of bad loans would certainly accelerate the redressal process. However, there are some issues that need to be looked into:

  • The size of the stressed assets is too big - According to a Business today, Indian banking system is struggling with total stressed assets worth Rs 14 lakh crore. This raises a serious question - Does RBI have the bandwidth in terms of understanding of the sector or company to issue borrower specific instruction for a bankruptcy?
  • No Buyers for Stressed Assets - Under the strategic debt restructuring (SDR), the RBI had allowed banks to take majority stake by conversion of debt into equity and replace the management. However, even though banks in some cases acquired stakes but failed to sell it to new promoters. There are no buyers for these assets or even if they are there, they want it cheap.
  • Bank recapitalization - The biggest constraint for public sector banks today is fresh capital. Many public sector banks are operating at minimum capital levels. While it is true that banks needs to control their deteriorating assets banks also urgently needs recapitalisation i.e. fresh capital.

Even though the step towards NPA resolution is good but the above issues are to be taken care. These issues are very critical and needs to be looked at urgently. Nevertheless, we believe this is a positive development for the banking sector.

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