The new powers given to RBI to tackle bad loans can initiate first massive shakeup of the system. Or will it? We investigate.
Resolving the Bad Loans problem in India
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- The Union Cabinet on May 3, 2017, cleared an ordinance empowering the Reserve Bank of India (RBI) to act against willful defaulters. Changes are being made to Section 35A of the Banking Regulation Act and also some of the provisions of the Bankruptcy Code. The ordinance has been approved by the President. This could be the legal climax of a long-standing problem of India.
- The ever-increasing Non-Performing Assets (NPAs), or stressed loans, have been the biggest problem facing the financial sector of the economy. As per the latest government data, public sector banks’ gross NPAs increased by over one lakh crore in the first nine months of the last financial year. By December 2016, non-performing Assets or bad loans with Indian banks rose to Rs. 6.07 lakh crore, of which the share of the Public Sector Banks (PSBs) was Rs. 5.02 lakh crore.
- Why worry? Well, the huge pile-up of bad loans blocked the commercial lending process, which is critical to get the Indian economy rolling again, and preventing banks from lowering interest rates. Banks have been hesitant in resolving the NPA problem through settlement schemes or asset reconstruction fearing probes by investigative agencies.
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- As part of the measures proposed by the lenders, the government and the RBI are looking to strengthen the current corporate debt restructuring mechanism that allows them to convert more than 10% of their loans into equity and also provides for a strengthened oversight mechanism.
- Presently, there is a two-member oversight committee comprising former CVC Pradeep Kumar and former vigilance commissioner Janaki Ballabh. This set-up will be further strengthened. Banks had also appealed to the FM against some measures in RBI’s NPA reduction plan as the Scheme for Sustainable Structuring of Stressed Assets (S4A) does not allow for increasing the tenure of loan or change in interest rates preventing lenders to rework loans.
- The concept of Non-Performing Assets (NPAs) was introduced in Indian banking system through the Narasimhan Committee recommendations on banking reforms of 1991. Thereafter, assets were classified into four categories – standard, sub-standard, doubtful and loss assets. Income recognition on accrual basis was prohibited. Banks were required to provide for bad loans in their balance-sheets. These were parts of the Prudential Norms.
- The government initiated various measures in the past to tackle the bad loans problem of banks and financial institutions. Debts Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunals (DRATs) were established under the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI Act), 1993 with the specific objective of providing expeditious adjudication and recovery of debts due to Banks and Financial Institutions.
- The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the SARFAESI Act) was enacted to allow banks and other financial institutions to auction properties to recover loans. Under this Act, secured creditors could take possession of secured assets or take over management of business of borrower upon the lapse of the 60-days notice period. Efforts over the past few years to resolve the bad loans issue have met with limited success.
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