House panel ‘not happy’ with management of bad loans by RBI, banks

“Not happy” with handling of bad loans by the RBI and banks, a Parliamentary panel said high non-performing assets (NPAs) raise serious questions about credibility of the mechanism to deal with the issue that is threatening the stability of the banking system.

It also said that the Reserve Bank hasn’t “quite succeeded” in enforcing its rules on bad loans as it should not be a passive regulator but exercise powers of punitive action against banks in case of defaults.

Bad loans staggering

As of September 2015, the net NPAs of public sector banks stood at ₹2.05-lakh crore, and while the gross NPAs were at ₹3.70-lakh crore.

“Such high incidence of NPAs obviously raises serious questions on the credibility of the mechanisms to deal with NPAs and stressed loans as such, even as certain estimates indicate that gross NPAs may touch ₹4-lakh crore by the end of this fiscal year,” said the report of the Standing Committee on Finance tabled in Parliament.

The Committee noted with “deep concern” that in spite of various measures taken by the Centre and the RBI from time to time, “the NPA problem confronting the financial sector and threatening the stability of the banking system seems far from over”.

It said that bank balance sheets continue to remain under pressure and recent quarterly results of banks are a “grim reminder” of the situation that banks find themselves in, with most of them reporting sharp dip in profits, with NPAs and provision for write-offs ballooning.

“On the one hand, the country’s economy is growing fast and competing with economic superpowers, and on the other hand, the rising trend of NPAs has the potential to damage this growth story,” it said.

The panel headed by senior Congress leader M Veerappa Moily said: “The Committee is thus, not happy with the management of the problem, on both fronts — at the level of the RBI and at the level of the banks. The banks have evidently failed to notice the early signs of stress on the loans disbursed by them.”

Spirit of guidelines

The report said the Committee is “constrained” to observe that the “RBI does not seem to have quite succeeded, as a regulator”, insofar as implementation and enforcement in letter and spirit of its own guidelines on stressed loans is concerned.

“Mere issuing of guidelines by the RBI does not seem to have yielded the desired results... As the Committee would not like the RBI to be a passive regulator, when major lapses occur in banks, it would be in the fitness of things if the RBI exercises its regulatory powers vis-à-vis banks to take punitive action in cases of default and to enforce their guidelines,” it said.

It also said the RBI as a regulator should have its regulatory role well delineated and thus not have its director on the board(s) of the banks as part of their management, “as conflict of interest may lead to avoidable laxity”.

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