Non Performing Assets & Resolutions -Join Watsapp Group

India is one of the fastest growing economies in the world. An important support system for the economy,

Banks provide much-needed credit to industries and developers. Good health of these support systems, in general, and banks, in particular, is essential to move on a high growth trajectory. However, the Indian banking system faces a crisis of non-performing assets (NPAs),

Which has been diminishing banks’ ability to infuse capital into the system further.

According to RBI, any loan or advance on which the payment of interest or principal instalments has remained overdue for more than 90 days, is termed as an NPA. The size of NPAs has reached alarming levels at Rs. 6.7 lakh crores, of which public sector banks (PSBs) account for over Rs. 6 lakh crores. The rising NPA is the result of the Twin Balance Sheet (TBS) syndrome, which includes impaired financial status of banks as well as large corporate houses. To confront the TBS challenge, the Government has come up with a 4-R Strategy:

1. Recognition: Value assets close to real value,

2. Recapitalisation: Infuse equity into sick banks to safeguard capital position,

3. Resolution: Sell off stressed assets, and

4. Reform: Avoid repetition of the problem

To ease Recognition, RBI has also initiated an Asset Quality Review (AQR) which mandates the banks to report actual NPAs in their balance sheets. Although transparent recognition norms have surfaced more stressed assets, there isn’t much progress in the resolution of NPAs.

In the last three years, RBI has come out with various schemes to tackle NPAs. Scheme for Sustainable Structuring of Stressed Assets (S4A), Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR) mechanisms, and Joint Lenders Forum (JLF) are some of the major ones. The government has cleared Insolvency and Bankruptcy Code (IBC) to reduce delays in insolvency resolution, announced Rs. 70,000 crores for recapitalisation, and set up Asset Reconstruction Companies (ARCs) for NPA resolution. However, these initiatives have not had their desired impact as yet. Reasons include banks’ reluctance in resolving NPAs through these schemes as selling bad loans to ARCs can potentially invite a host of investigation agencies questioning the deals or labelling them biased. JLF, intended for quick decision-making, has also become a bottleneck. Any decision by the forum needs approval of at least 60% of the consortium lenders by number and at least 75% by value. This one-size-fits-all approach is not a good solution to deal with a problem of this magnitude.

The Government has recently proposed a new NPA resolution policy that comes with measures to alleviate the stressed assets: Banking Regulation Act is amended, and it empowers RBI to direct the banks for recovery of NPAs by initiating insolvency resolution under IBC. RBI can now set up oversight panels to shield bankers from investigation agencies. This will provide indemnity to bankers from any legal responsibility. These control boards also aim to reduce banks’ problems by adopting sector-specific strategies. Moreover, banks can opt for haircuts in settling loans under the guidance of RBI. JLF can now make decisions agreed upon by 50% of lenders by number and 60% by value. The Government has empowered itself by directing RBI to initiate the NPA resolution process once a default is established. This provision has come under criticism as it tends to undermine RBI’s authority as an independent regulator.

Although the amount of NPAs is huge, the problem mainly confines 40–50 companies, mostly in power, steel, heavy metal, and textile sectors. Adopting specific strategies for these organisations is feasible. RBI has already identified 12 such accounts that constitute around 25% of the NPAs. This targeted approach to resolving the problem seems effective and promising. This also becomes important as we try to retain investor confidence in the Indian market. Lately, our economy has undergone some large-scale reforms including demonetisation of the high currency bank notes, and Goods and Services Tax (GST) which has brought in a revamped arrangement for indirect taxes. These big ticket reforms seem to have sidelined the NPA problem, but it needs more attention than ever before. A well planned, government-guided, and RBI-led action is the need of the hour.

Agree? Disagree? Please share your thoughts in the comments section

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