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Can the RBI's Action Plan Resolve The NPA Crisis?
Wed, 24 May Pre-Open

There is no doubt to the fact that India's banking sector has a problem. The banking sector has over Rs 10 trillion worth of stressed and non-performing assets. And it has only gotten worse in recent times.

According to an article in Livemint. The bad loans of public sector banks jumped by over Rs 1 trillion during the April-December period of 2016-17. The gross NPAs of PSU banks' in the first nine months of the current fiscal increased to Rs 6.1 trillion by December 31, 2016, from Rs 5 trillion during 2015-16.

For private sector banks, gross NPAs rose to Rs 703.2 billion by December 31, 2016, from Rs 483.8 billion as on March 31, 2016.

The government and the Reserve Bank of India (RBI) have taken cognizance of the matter and have begun measures to address the looming crisis.

Earlier this month the government through an ordinance provided the Reserve Bank of India (RBI) with greater powers to intervene in the resolution of non-performing loans (NPLs). If nothing else, the ordinance is an acknowledgement that the bad loan scenario is far more worrying than what the government and the RBI portrayed it.

The RBI, earlier this week released an action plan to implement the Banking Regulation (Amendment) Ordinance 2017, which includes the option of rating assignments being determined by the RBI and increasing the size and scope of the oversight committee (OC).

The RBI will increase the number of members in the oversight committee which presides over the restructuring proposals and also expand the scope of the committee beyond the so-called scheme for sustainable structuring of stressed assets (S4A).

At present, the OC comprises of two Members. It has been constituted by the Indian Banks Association in consultation with the RBI. However, the RBI did not say how many members the revamped OC would include.

The RBI is also planning for larger role for credit rating agencies. In order to prevent credit shopping or conflict of interest, RBI is proposing to assign cases to ratings agencies itself.

Further, the RBI is also working on setting up a framework for the disposal of cases under the Insolvency and Bankruptcy Code (IBS). The central banker has already sought information on the current status of the large stressed assets from the banks. And would be constituting a committee comprised majorly of its independent board members to advise it in this matter.

The regulator has made swift moves to start the necessary clean up in the country's banking sector.

However, The RBI has an enormous task at hand if it plans to remedy the crisis PSU banks now face. According to the Economic Survey, about 33 of the top 100 stressed debtors would need debt reductions of less than 50%, 10 would need reductions of 51-75%, and no less than 57 would need reductions of 75% or more.

Banks have been reluctant to resolve NPAs through settlement schemes or sell bad loans with hair cut to asset reconstruction companies for fear regulation and investigation.However, with the ordinance giving a wide range of powers to the RBI and the apparent will of both the regulator and the government, a path towards resolution of the NPA crisis would well be underway.

As the Economic Survey said, "the road to resolution remains littered with obstacles, even for the most ordinary of bad debt cases." It would take a coordinated effort from the RBI, the government and the banks to tide over the NPA crisis.

We will be sure to keep a track on developments in this space.

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