NPA Ordinance: Step in the Right Direction?

Wed, 10 May Pre-Open

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Last week, the government through an ordinance provided the Reserve Bank of India (RBI) with greater powers to intervene in the resolution of non-performing loans (NPLs). If nothing else, the ordinance is an acknowledgement that the bad loan scenario is far more worrying than what the government and the RBI portrayed it.

It is also the admission that earlier plans to deal with the banking sector stressed assets --corporate debt restructuring (SDR), strategic debt restructuring (SDR) and, the scheme for sustainable structuring of stressed asset (S4A) have largely failed to resolve the problem of non-performing assets (NPAs).

In comparison to the private sector, the bad loans number in public sector banks (PSBs) have risen sharply.

According to an article in Livemint. The bad loans of public sector banks jumped by over Rs 1 trillion during the April-December period of 2016-17. The gross NPAs of PSU banks' in the first nine months of the current fiscal increased to Rs 6.1 trillion by December 31, 2016, from Rs 5 trillion during 2015-16.

For private sector banks, gross NPAs rose to Rs 703.2 billion by December 31, 2016, from Rs 483.8 billion as on March 31, 2016.

In such a situation, the ordinance giving more powers to the RBI is a step in the right direction.

But the jury is still out on whether these changes will make a significant dent on the magnitude of the problem - and if it does, how soon some positive results would flow in to make a favourable impact on the economy, the banking sector's lending behavior, and the country's investment climate.

The RBI has an enormous task at hand if it plans to remedy the crisis PSU banks now face. According to the Economic Survey, about 33 of the top 100 stressed debtors would need debt reductions of less than 50%, 10 would need reductions of 51-75%, and no less than 57 would need reductions of 75% or more.

No public sector bank would willingly sign off on such huge write-offs for the fear of being investigated for granting these loans in the first place.

Much has been made of public sector bankers' fears of the investigative agencies. But if it is this fear that inhibits them from recommending write-downs of loans, why did it not prevent them from granting these loans in the first place?

A plausible reason would be that bankers are carried away by a wave of optimism during good times and don't keep a check on the underlying asset quality before granting loans.

The Ordinance also allows the RBI to set up oversight committees for banks with NPAs that remain a matter of concern requiring early resolution. This will certainly empower the central bank to enforce a closer supervision of banks with sticky loans, but it provides with no solutions to help prevent granting of such loans and in turn puts the onus on the RBI to detect and rectify problem areas.

To sum up, 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.

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