NPA ordinance: Why the new law is simply underwhelming

The announcement of the much-awaited NPA ordinance — supposedly the panacea for all NPA-related problems plaguing the banking sector — is at first glance, simply underwhelming. One wonders if this was all that the government was going to come up with to tackle the issue of non-performing assets, then what was the big build-up about?

This is like the let down that movie fans experience after being led to believe that a huge blockbuster, the likes of which one has never seen anytime in the past, is about to release in a theatre nearby. One discovers in the end that it is another dud and was all about clever marketing campaigns, PR stunts and teasers that kept one on the edge for months.

The NPA ordinance is apparently empowering the RBI to direct banks to tackle the NPA problem by either intervening directly or by appointing oversight committees which will provide their stamp of approval and eliminate the fear of vigilance enquiries and second guessing on commercial decisions taken in good faith.

If one were to interpret this a bit harshly, one could surmise the following – 1) Till now the RBI didn’t have the power to do anything and it has got it this morning.

2) The RBI has now been made a player in the NPA resolution process.

Its role as a regulator — as one above the dust and dirt of commercial banking — will now almost certainly be weakened. Wouldn’t there now be a new conflict of interest in its responsibilities? If it is going to sign off on the deals commercial banks struck with recalcitrant borrowers, then it cannot question the wisdom of the decision in its supervisory role, can it?

Whenever the banking system has been confronted with a logjam on the NPA issue, its favourite escape clause has been to say that the existing laws are inadequate for a resolution of the problem. We have therefore, had a succession of laws and schemes and institutions (including the latest one — insolvency and bankruptcy laws and the associated infrastructure coming up), over the past two decades and more. Somewhere along the line, it may be worth remembering that this problem and solution are symptomatic of the many ills that plague this country. We have never had a shortage of laws, just the spine to implement them.

COMMENT NOW