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Govt may bring down bad loan limit from ₹2,000 crore to ₹100 crore
The banking system has around ₹10 trillion of stressed assets, according to some estimates. Of this, approximately ₹7.7 trillion is NPAs and the rest, restructured loans, where a resolution process has been launched.
The Narendra Modi government is considering a more rapid tightening of norms than previously planned for bad loan resolution by making applicable the current 180-day timeline for the resolution of large Non Performing Assets (above ₹2,000 crore) to smaller ones (above ₹100 crore) too, according to a government official familiar with the matter who asked not to be identified.
The original plan was to do this gradually over a two year period.
The government has been under pressure from opposition parties over the seeming rot in the banking system -- including bad loans (which the National Democratic Alliance has pointed out, largely stems from loans issued during the previous United Progressive Alliance era), and frauds.
In February, the Reserve Bank of India, the banking regulator, scrapped several debt restructuring schemes and said in a statement that in cases where the banking sector’s aggregate exposure is over ₹2,000 crore in large accounts that have been classified NPAs, banks have to implement a resolution programme within 180 days, failing which they have to launch insolvency proceedings “singly or jointly,under the Insolvency and Bankruptcy Code 2016 (IBC) within 15 days from the expiry of the said timeline.”
RBI’s intent at the time was to crack down on both NPAs and restructured loans.
The banking system has around ₹10 trillion of stressed assets, according to some estimates. Of this, approximately ₹7.7 trillion is NPAs and the rest, restructured loans, where a resolution process has been launched. But stretching the threshold to “ ₹100 crore, if that number is true” seems to be a classic instance of “overkill”, a banking sector analyst said, asking not to be identified because he says he doesn’t want to be seen to be condoning “defaults”.
“The reduction of the threshold may happen earlier than expected,” an official said.
Still, the move, if it happens, will not be unexpected. In the February statement itself, RBI said that it could announce a similar resolution deadline for accounts with aggregate exposure between ₹100 crore and Rs2,000 crore , over a two year period.
When that happens, smaller loans, and more companies will be on the radar of lenders. Declaring a loan default as an insolvency means banks will be allowed to seize assets like it had done in the Kingfisher airline episode. To be sure, a significant chunk of the NPAs in the system are from large defaulters. For instance, the 12 largest account for a fourth of gross NPAs.
The latest move comes amid the fierce political criticism against the government following the fraud at two public sector banks: Punjab National Bank and UCO Bank. Public sector banks account for 70% of the Indian banking industry and their gross Non-Performing Assets have increased by over 4,54,000 crore between March 2015 and June 2017, according to government data, forcing the government and RBI to rethink their strategy.
