The Reserve Bank of India (File Photo) The Reserve Bank of India (File Photo)

Bankers and financial experts are expecting a series of measures including strengthening of the oversight committee to break the deadlock in loan recasts, sale of stressed assets to other state-owned firms and bringing recast decisions outside the purview of investigative agencies, in the wake of the latest government package to check the rise of bad loans in the banking sector.

The Reserve Bank of India (RBI) which will be empowered to take more effective decisions after the President signs the ordinance to amend Section 35A of the Banking Regulation Act is expected to step in and announce a series of measures to resolve the issue. Currently, the RBI is empowered “to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply…”

“We expect the RBI to empower the oversight committee to take decisions on NPA resolution. This will break the deadlock as banks are not taking decisions now. Banks were not ready to agree for big haircut till now. This will free bank management from the purview of investigative agencies. After the Kingfisher-IDBI loan issue, banks virtually stopped taking decisions on big loans,” said the MD of a public bank.

Meanwhile in Delhi, finance secretary Ashok Lavasa said that the proposed amendments would make the bad loan resolution process “more effective” and provide comfort to bankers in addressing the NPA issue. He said there is appetite in the Indian market should the banks choose to conduct a public auction of stressed assets. “It is not possible for me to put down a number on how this will go down (NPA) but certainly we feel that these changes will make the system more effective in handling the bad loans and gradually with the professionalism that exists in our banking system and with the participation of the promoters themselves and the companies, we should be able to reach resolution in many of the cases,” Lavasa said. He said resolution is expected to pick up pace especially in infrastructure and steel sectors.

The Central Bureau of Investigation’s move to arrest four former officials of IDBI Bank in connection with the over Rs 6,800-crore loan default by Kingfisher Airlines had stoked concern and uneasiness in the banking fraternity. Credit growth had dipped to 4.8 per cent — a six-decade low — with demonetisation adding to the sharp decline in credit demand amid fears of enforcement action.

Another expectation of bankers is the formation of four or five oversight committees which will oversee the resolution of NPAs across the spectrum. These committees won’t be restricted to just loan recast proposals under the Scheme for Sustainable Structuring of Stressed Assets (S4A) model which have evoked only a lukewarm response so far. They are likely to oversee all loan restructuring proposals including Joint Lenders Forum (JLR) and corporate debt restructuring proposals. Such committees can be set up for major sectors like iron & steel, infrastructure and textiles where the RBI and banks have identified the top 40-50 defaulters, said a banking source, adding, “getting the right haircut is the nagging issue now. The panel can decide it now. The RBI is also likely to relax the provision that lenders with 75 per cent of the value should clear the recast.”

“While RBI monitors the banking system through regular oversight mechanisms like inspection etc., the proposed move makes the RBI’s role more explicit. Targeting the top NPAs in value terms through oversight committees could potentially ease up the pressure on the banks. The far reaching points, however, are the proposed amendment which could take the commercially viable loan recast decisions outside the purview of investigative agencies and the power to the committee(s) to break the deadlock in JLF,” said Mehul Pandya, executive director, CARE Ratings. Public banks are sitting on bad loans worth Rs 6 lakh crore.

According to former IOB CMD M Narendra, the government and the RBI are going in the right direction to tackle bad loans. “The strengthening of the RBI, bank managements and the oversight committee will help banks in sorting out legacy NPAs. The ordinance together with the changes in the Bankruptcy Code, DRT Act and Sarfaesi Act will help banks in cleaning up the system by FY19,” Narendra said.

RBI Deputy Governor SS Mundra had already indicated that the message that the RBI was trying to give is that all these instruments (S4A, 5/25 scheme, SDR, CDR etc) are meant for resolution in a serious sense and not for postponement of the problem. “That will be the focus going forward,” he said last month.While there’s a talk of creating a ‘bad bank’ to tackle NPAs, financial sector experts say it many not be a workable solution. “If the government funds the bad bank, the haircut for recasts would be lower but then the gvernment will face a hole in its finances. There was no indication of government funding in the Budget. If the private sector funds the bad bank, the haircut is going to be bigger. Then banks will face bigger losses. They will have to make 25 per cent provisioning as well. There’s also a possibility that PSU banks will be allowed to sell assets to other PSU units,” said Udit Kariwala, analyst (financial institutions), India ratings.

RBI Deputy Governor Viral Acharya had also proposed two models. The first is the creation of Private Asset Management Company (PAMC). This plan would be suitable for sectors where the stress is such that assets are likely to “have economic value in the short run, with moderate levels of debt forgiveness”. Acharya’s second model is the formation of the National Asset Management Company (NAMC). This plan would be necessary for sectors where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short- to medium-term, he had said in February.

As the government and the RBI discuss various measures, bad loans are ballooning without any let-up. A recent ICRA report has projected the gross NPAs to increase to Rs 7,50,000-7,70,000 crore (9.7-10 per cent of advances) by end of FY2017 and Rs 8,20,000-8,50,000 crore (9.9-10.3 per cent) by the end of FY2018 with upside risks in case of slower resolution of SDR accounts leading to higher slippages.

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