By amending the Banking Regulation Act, authorising the Reserve Bank of India to issue directions to banks to initiate insolvency resolution process, the government seems to be going in the right direction towards resolution of the bad loans crisis facing public sector banks, say market experts.

However, there are also concerns in some quarters that the RBI’s micromanagement on NPA resolution could undermine bank management’s autonomy.

While as of now the Section 35A of Banking Regulation Act effectively includes a very wide range of measures and directives which a central bank can give, it misses out on two factors — time-bound action, and valuation and assigning haircuts, which have been hampering the cleaning up of non-performing assets (NPA) across banks, said CARE Ratings.

The current stock of stress in the Indian banking system is estimated at ₹11.80 lakh crore, according to an Assocham-SIPI-Edelweiss study. Stressed assets, as much as 15 per cent of advances (9.84 per cent NPAs and 4.2 per cent restructured assets), is a matter of concern for the economy, the study added.

Firm commitment

Arundhati Bhattacharya, Chairman, State Bank of India, said: “Amendments to the Banking Regulation Act, coming on the heels of the enactment of the Insolvency and Bankruptcy Code and amendments to the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) and Debt Recovery Tribunal Acts indicate the Government’s firm commitment to find a satisfactory solution to the NPA resolution problem.

“Empowering the RBI with an explicit mandate should reorient various stakeholders for effective NPA resolution. The country and its banking system needs to move quickly and decisively to take benefits of these enabling provisions,” she said.

In a note, Madan Sabnavis, Chief Economist, CARE Ratings, and his team observed that a large proportion of the stressed accumulated on the books of the banks has been caused by the top-50 defaulters and the same has to be resolved and recovered at the earliest.

KVS Manian, President, Kotak Mahindra Bank, said with close oversight, if the RBI can shepherd the (NPA resolution) process in a manner that will drive outcomes and speedier action on wilful defaulters, it will reduce the NPA overhang in the banking system. Udit Kariwala, Senior Analyst, India Ratings, said: “While one can’t expect a quick fix solution from the Government to fix this deep routed problem, the ordinance does try to address the recent build-up of apathy towards the resolution decision making process, specially among public sector lenders. Bringing the RBI on board by taking their buy-in for the overall resolution decision making process does pave a way for a more collaborated and concentrated effort.”

Siby Antony, MD & CEO, Edelweiss Asset Reconstruction Company, underscored that more than 60 per cent of the stress in the banking system is currently in capital-intensive sectors such as steel, cement, power, aviation and shipping/ ship-building, construction and real estate.

“There was excessive leveraging and over-investment during the phase (2004-2008) of high growth….RBI introduced several tools such as conversion of debt into equity by banks of the borrower under stress, restructuring over a period of 20-25 years, and the concept of sustainable debt and flexible restructuring.”

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