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Can RBI Uproot the NPA Rot?
Wed, 31 May Pre-Open

The government is taking a close look at stressed assets worth Rs 5 trillion of various corporates, as it steps up its efforts to resolve a heightening crisis in the country's banking sector.

As per an article in The Economic Times, the government, the Reserve Bank of India (RBI) and even probe agencies are scanning about 50 stressed assets, which have been put on a watch list.

The list represents stressed accounts, which includes loans that have turned bad or been restructured as of December 2016. The total value of such top 50 loans is estimated to be around Rs 4-5 trillion, which is almost 80-85% of the total bad loans for state-run lenders.

Bad loans at public sector banks have grown more than Rs 1 trillion since April 2016 to Rs 6 trillion crore as of 31 December 2016. Recent NPA issues of Yes Bank and IDBI Bank also signal a worrying trend.

However, NPAs are just a part of the problem. According to former RBI deputy governor KC Chakrabarty, the total stressed assets in the sector soon could reach Rs 20 trillion.

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As more and more skeletons come out of the closet, it's important to identify the root cause of the problem. That of corporate debt. Apart from the banking sector, corporate debt also has serious implications for the overall Indian economy.

Banks with a sizable amount of bad loans on their books are reluctant to lend to even healthy companies. This will adversely impact the growth of the economy going forward.

The Indian government has recently stepped up its efforts to address the problem. As part of this, the government has amended the The Banking Regulation Act through an ordinance, giving more teeth to the RBI to deal with NPAs.

The ordinance essentially gives power to the RBI to give directions to banks for the resolution of bad loans from time to time. It also allows the Indian central bank to appoint committees or authorities to advise banks on the resolution of stressed assets.

Though this has been touted as a big boost to the government's efforts to tackle the problem, there is also a view that the RBI - the banking regulator will be sitting at every negotiation table for resolving bad loans.

The ordinance does nothing to remove the constraints that banks face while taking commercial decisions about their loan accounts. As the Economic Survey said, "the road to resolution remains littered with obstacles, even for the most ordinary of bad debt cases." The difference is that now it is the RBI who will be responsible for surmounting those obstacles, rather than the banks themselves.

Also, what precedence does this set for banks? In the business of lending, one cannot wish away bad loans. There will be slippages even when the Indian economy is doing well. Banks will be lending to the same companies that are now bad assets in their books. It is unsettling that the only entity determined to clean up the bad loan mess is RBI.

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Apr 15, 2021 01:32 PM