The Reserve Bank of India (RBI) recently announced an ordinance to tackle non-performing assets (NPAs) plaguing Indian banks.
In February, media reports estimated total NPAs of state-owned banks at Rs. 614,872 crore—or approximately $95 billion — for the year ended December 2016. This number was expected to have risen in the aftermath of the demonetisation, with small & medium enterprises (SMEs) struggling to carry on business. NPAs had already shot up by 135% over the previous two years, despite the RBI taking a host of steps to control them. “If you include Rs 400,000 crore worth of write-offs since 2000, then I will say that Rs 10 lakh crore ($155 billion) is the real NPA,” said the RBI’s former deputy governor K C Chakrabarty.
The ordinance’s arrival is viewed positively by the banking sector. It is hoped that it would provide bankers teeth to go after defaulters, liquidate their assets to recover loans and not worry about being persecuted by the investigative agencies.
Here’s a look at five reasons the ordinance has been met positively by the industry.
The ordinance helps in setting a time-bound process for NPA resolution. In the past, these processes would take an enormous amount of time. Now, the RBI has been empowered to create committees to oversee the resolution, and ensure due processes are followed. The committee can also impose penalties where processes are not completed in a time-bound manner and help them take cases to the National Company Law Tribunal, which was constituted in 2016.
The RBI has created a process by which the bankers can be confident that they wouldn’t be pursued by investigative agencies. In the old model, one of the reasons why decisions would remain pending for long is that banks feared taking a write-off and being persecuted later. Let’s say they claimed back 75% of a disbursed loan amount. There was a fear that they would be pursued later. But the new ordinance has created a process in which there is an oversight committee, which provides an umbrella protection and confidence to the bankers that they can make their best efforts to settle an NPA, and if due processes are followed, they would not be individually pursued. The ordinance thus helps create trust that the resolution process is above board.
The norms for consensus have been reduced, whereby now, 50% of lenders by value and 60% of lenders by number will be enough for NPA resolution. These numbers were 75% by value and 60% by number earlier. They’ve made it easier for groups to come to a decision by reducing these cut-offs.
Liquidation of defaulters’ assets
Banks can make use of the Insolvency & Bankruptcy Code 2016, and proceed to take NPA cases to resolution. Let’s say there’s a borrower who is saying he’s not going to repay his loan. The law, passed in 2016, can be invoked as per the RBI ordinance. The borrower can then be taken through a liquidation process in order to recover the loan.
The ordinance reveals that the government considers NPAs a serious problem that needs to be tackled head on. Kudos to them. The executive branch’s urgency in ridding the economy of this tumour is laudable. It has been a tough problem to solve. This intent is a positive for the banking system as a whole.
(The writer is CEO, BankBazaar.com)