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Five ways govt, RBI trying to speed up NPA recovery

The government is set to promulgate an Ordinance to help banks tackle the menace of mounting bad loans, which is denting profits of lenders, slowing credit flow to industry and hurting the economy.

business Updated: Jul 08, 2017 18:47 IST
Raj Kumar Ray
Finance ministry and the RBI are working towards riding public sector banks from the menace of NPAs.
Finance ministry and the RBI are working towards riding public sector banks from the menace of NPAs.(Arvind Yadav/HT PHOTO)

The government is set to promulgate an Ordinance to help banks tackle the menace of mounting bad loans, which is denting profits of lenders, slowing credit flow to industry and hurting the economy.

The cabinet on Wednesday approved promulgation of an ordinance to amend the Banking Regulation Act to speed up recovery of bad loans.

The move comes after clarion calls from lenders who have been jostling with stressed assets mounting to about Rs 10 lakh crore, or close to 7% of India’s GDP, as of December-end.

Here are five ways the government and Reserve Bank of India can speed up recovery of non-performing assets (NPAs).

1. Amendment in banking law to give RBI more powers

The Banking Regulation Act may be amended to give RBI more powers to monitor bank accounts of big defaulters.

The amendment in the banking law will enable setting up of a committee to oversee companies that have been the biggest defaulters of loans.

RBI wants stricter rules for joint lenders’ forum (JLF) and oversight committee (OC) to curb NPAs.

While the present law allows the government to direct RBI to carry out inspection of a lender, there is no provision for setting up oversight committees.

Also, there could be changes in the laws, which will bar a bank to extend loans to a defaulting company that has failed to repay to other banks.

2. Stringent NPA recovery rules

The government has over the years enacted and tweaked stringent rules to recover assets of defaulters.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or Sarfaesi Act of 2002 was amended in 2016 as it took banks years to recover the assets.

Experts have pointed out that the NPA problem has to be tackled before the time a company starts defaulting. This needs a risk assessment by the lenders and red-flagging the early signs of a possible default.

3. RBI’s loan restructuring schemes

RBI has over the past few decades come up with a number of schemes such as corporate debt restructuring (CDR), formation of joint lenders’ forum (JLF), flexible structuring for long-term project loans to infrastructure (or 5/25 Scheme), strategic debt restructuring (SDR) scheme and sustainable structuring of stressed assets (S4A) to check the menace of NPAs.

In many cases, the companies have failed to make profits and defaulted even after their loans were restructured.

4. Present NPA scenario

According to the latest information collated by the government, stressed assets which includes both non-performing assets as well as restructured loans of banks stood at Rs 9.64 lakh crore as on December 31, 2016.

In December, RBI’s financial stability report said the gross non-performing advances (GNPAs) ratio of all banks increased to 9.1% by September 2016 from 7.8% in March 2016. The amount of stressed loans was up at 12.3% of total loan given out by banks by September, up from 11.5% in March 2016.

RBI’s stress test of the banking sector indicated that GNPA ratio may increase from 9.1% in September 2016 to 9.8% by March 2017, and further to 10.1% by March 2018.

PSU banks are worst hit as their GNPA may increase to 12.5% by March 2017 and then to 12.9% in March 2018, from 11.8% in September 2016.

5. Banks may need to take a “hair cut”

In the past few quarters, most of the banks especially PSU lenders, have reported a sharp fall in profits as they set aside hefty amounts for losses on account of NPAs, which eroded their profits.

Given the gravity of the problem, the government may ask banks to go for more “hair cut” or write offs for NPAs.

The government and RBI may also come up with a one-time settlement scheme for top defaulters before initiating stringent steps against them.

The finance ministry and RBI are also considering setting up of a “bad bank” to deal with the problem of non-performing loans, as it has been suggested by chief economic adviser Arvind Subramanian in the Economic Survey.

Reserve Bank deputy governor Viral Acharya has also floated the twin concept of Private Asset Management Company (PAMC) and National Asset Management Company (NAMC) for resolution of stressed assets.

With rule changes and strict regulations, banks may be asked to restructure about 50 large NPA accounts by December, 2017.