MUMBAI: Does the Banking Regulation Act, 1949, hold the keys for NPA resolution? The government thinks so. Based on RBI’s advice, it will amend Section 35 of the Act, giving more leeway to the regulator in the hope of solving the bad loan mess with renewed vigour.
The proposed ‘package,’ to be announced on Friday, is likely to make it flexible for banks to take haircuts, auction stressed assets to asset reconstruction companies at discounted prices or speed up recoveries, which has been a stumbling block for banks.
“This will be a substantial step forward giving clarity on tackling NPAs,” sources told Express.
Rising bad loans forced the central bank, led by former governor Raghuram Rajan, to step up efforts almost three years ago, but with little success.
Analysts say that unless provisions allow RBI or banks to take difficult but necessary decisions, the NPA problem will persist. “To avoid this, the government will be involved in resolving cases this time,” sources added.
Early this month, RBI Deputy Governor S S Mundra indicated that the joint action-plan proposed by RBI and the finance ministry will involve sector-specific and size-specific mechanisms. “A one-size-fits-all solution won’t work,” he said. As per the new framework, RBI will take the top 30-40 loan defaults, sit with the bankers and oversight committees to determine a custom-made solution.
Banks went into an overkill extending credit to various projects. But the animal spirits unleashed following the global economic crises soon came to a naught. Toxic loans piled up leaving behind acid burns (read net losses) that’s taking years to heal. The government in the past initiated sector-specific measures catering to infrastructure, power, road, textiles, and steel, where the incidence of bad loans is high.
Then came the Insolvency and Bankruptcy Code, amendments to the Sarfaesi Act and the Recovery of Debts due to Banks and Financial Institutions Act to improve resolution recovery of bank loans, setting up of six new Debt Recovery Tribunals to augment loan recoveries, but none made a difference.
RBI’s schemes
Corporate Debt Restructuring: Allows timely mechanism for restructuring debt of viable entities facing internal and/or external issues
Joint Lenders Forum: To identify stressed assets early and administer a corrective action plan within 45 days
5/25 scheme: Allows flexible structuring for long-term loans to infrastructure and core industries
Strategic Debt Restructuring: Allows banks or consortium lenders to change ownership in cases where the economic value of the loan assets and the prospects of recovery are high
Sustainable Structuring of Stressed Assets (S4A): converts a portion of large loan accounts into equity shares. Unlike SDR, S4A allows existing owners to continue as long as the default isn’t willful