CII moots 5-point action plan to improve asset quality of banks

Industry body CII has recommended a five-point action plan to help banks deal with steep deterioration in asset quality.

The suggestions, made to the Finance Ministry and the Reserve Bank of India, include revamping the corporate debt restructuring mechanism and setting up of a national asset management company.

CII also suggested the creation of a special resolution mechanism for the infrastructure sector; easing norms to increase capitalisation of asset reconstruction companies, and improving the effectiveness of the insolvency regime and implementation of the legal framework.

The industry body attributed the sharp deterioration in asset quality of the banking sector to steep economic downturn, with GDP growth declining from close to 9 per cent to below 5 per cent over the last couple of years, and high interest rates.

Big challenge Chandrajit Banerjee, Director-General, CII, in a statement said, “Owing to their impaired portfolios, banks are hesitant to extend credit and this affects growth in the corporate sector. CII’s suggestions are keeping this reality in mind.”

CII said the rapid upsurge in non-performing assets (NPAs) and restructured loan accounts remains one of the biggest challenges for the Indian banking system.

Stressed loans in India, those categorised as bad and restructured, crossed 10 per cent of all loans in mid-FY14 and are expected to touch 15 per cent by the end of fiscal 2015.

CDR The industry lobby said there was a need to revamp the corporate debt restructuring (CDR) mechanism through realignment of the legal system to make remedies available for the creditor as well as phasing out of curbs on asset classification and provisioning.

Further, CDR revamp should also see enhancement in project appraisal standards, increasing accountability of promoters during the restructuring process, and time-bound assessment and approval of the restructuring proposal.

CII said a special resolution mechanism to deal with stress in infrastructure sector could be done by setting up a special purpose infrastructure fund and/or a development financial institution, which would lend to projects that require last-mile funding and are classified as stressed assets.

The industry body said the Government and the RBI should facilitate the formation of a National Asset Management Company (NAMCO) with banks as its major and initial shareholders with an equity base of ₹5,000-6,000 crore.

The main activities of NAMCO could include NPA acquisition, aggregation and resolution, including the sale of businesses, or assets, or management change.

ARCs CII observed that there was a need to address the issue of shortage of capital for Asset Reconstruction Companies (ARCs).

The industry body recommended that the RBI make it easier for ARCs to raise capital in its final guidelines on ARCs by relaxing restrictions on the equity that a single entity can hold in them and allow banks to extend loans to them against future receivables.

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