Can amendment to Banking Regulation Act expedite Clearance of NPAs?

Can amendment to Banking Regulation Act expedite Clearance of NPAs?

Can amendment to Banking Regulation Act expedite Clearance of NPAs?

The crisis of NPAs hangs on the banking sector due to its magnitude. The total NPS of the banks (both private and public) are valued at 9.4 trillion. The NPAs of the public sector banks have arisen to 6.05 lakh crores from 5.05 last year, as per the figures released in the current financial year.
S No.BankTotal Advances (Rs. In crore)Gross NPA (Rs. In Crore)NPA Ratio(%)
1.Allahabad Bank145,32818,76912.92
2.Andhra Bank137,22814,13710.3
3.Bank of Baroda269,11535,60413.23
4.Bank of India274,39143,93516.01
5.Bank of Maharashtra103,14813,04012.64
6.Bharatiya Mahila Bank Ltd.62730.4
7.Canara Bank311,61530,4809.78
8.Central Bank of India185,71925,10713.52
9.Corporation Bank142,78715,72611.01
10.Dena Bank81,1149,63611.88
With INR 6 lakh crore NPAs, banks may be asked to auction stressed assets. Indian Overseas Bank fares worst, having the highest ratio of NPA to total advances - 20.26 percent. UCO Bank (18.66 percent) and Bank of India (16.01 percent) follow.

Source: Hindu and TOI

About the Banking Regulation Amendment Ordinance

Here are the three key measures proposed in the ordinance:

1. The government may authorize the Reserve Bank of India (RBI) to issue directions to banks to initiate insolvency proceedings against defaulters under the bankruptcy code.

2. RBI on its own accord can issue directions to banks for resolution of stressed assets.

3. RBI may form committees with members it can choose to appoint to advise banks on resolution of stressed assets.

Let's see if the Banking Regulation Act Amendment and Insolvency Act will expedite clearance of NPAs.

Yes

1. RBI is empowered

The Government by promulgating the RBI has empowered it to give directions to the banks in the resolution of NPA proceedings and also amended a section of the Insolvency Act. The RBI is expected to issue guidelines on the subject soon.

2. Addressing the Root Cause

The NPAs arise as PSU banks are guided by the government to finance non-viable projects for social purposes. Money invested in infrastructure projects which has become a liability, as many projects have failed to take off. A sector which is debt ridden is the power and telecom sector, for example.

In telecom, due to lack of generation of revenue due to telcos liability, the capacity to pay loans is severely impacted.

In the power sector, PPAs are not ready despite generation of power. Structural changes were needed for addressing the reduction of NPAs which this amendment has fostered.

3. Banks No Longer Protected

Banks no longer enjoy protection for investigation into sanctioning loans that have turned bad and got embroiled in legal proceedings. When they initiate proceedings for recovery of bad loans, the converse of restructuring is open. Rather than larger capital base to absorb bad loans, banks will now have to mandate the responsibility for project viability evaluation on their own shoulders.

4. Power to Act

These measures, in effect, give the RBI and the central government powers to act directly against any company which has defaulted on its loans. This will prompt a transparent and market determined process.

No

1. Fusion of Capital

The issue of fusion of capital is yet to be addressed though the Amendment has provided an institutional cover to banks in the resolution of proceedings against the NPAs. Unless there is capital infusion, the banks may fall off the cliff.

2. More Action

The Bankruptcy Act should be amended along with the Insolvency Act to strengthen banks to also take prompt action against the NPAs.

The insolvency and bankruptcy code is a time-bound process and seeks to reduce the time for resolving a default case to less than a year as against the average time taken of more than four years currently.

Earlier, there used to be a system called credit authorization scheme.

Any loan beyond a limit required the RBI’s authorization. If RBI had the power to decide how much banks could lend to a certain borrower, then it could definitely look at resolution package. The need to resolve the crisis is urgent. Guidelines issues by RBI will give more confidence and protection to banks to initiate recovery of bad loans and resolution proceedings against NPAs. This is a welcome step in the right direction.
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