What is NPA?
Non-Performing Asset (NPA) is a loan in respect of which either the interest or principal or both remains due for a specified period. Banks usually classify the loan as NPA after 90 days of nonpayment of interest or principal. Banks classify assets into st andard, sub-st andard, doubtful and loss assets and create provisions accordingly. These provisions reduce the capital available with the financial institution to provide subsequent loans.
Currently, the NPA in banking sector st ands at an estimated figure of Rs 6.7 lakh crore with around Rs 6 lakh crore with public sector banks itself.
The NPA Ordinance
- The ordinance authorizes the central government to direct the Reserve Bank of India (RBI) and urge it to direct banks to initiate the NPA resolution process in case of a default. The earlier provisions of Banking Regulation Act did not allow for the same. Moreover, the management of the banking company, especially in the state-owned banks, feared to force the borrowers in the resolution of NPA as such actions encouraged questions and probe by investigation agencies of the government. By putting the onus to resolve NPAs on the central government and RBI, the ordinance will help banks to address the NPA crisis more vigorously.
- The Ordinance allows the RBI to set up oversight committees for banks with NPAs. The committees will advise banks on a faster resolution of stressed assets. This will allow banks to settle the sticky loans in a time bound manner. The committee members will be appointed by RBI.
- Earlier banks were reluctant to sell the stressed asset off their balance sheet to an asset restructuring company or private equity funds due to uncertainty regarding the price of the impaired asset, which if sold cheap could potentially lead to a probe by investigation agencies. The ordinance allows the overseeing committee, appointed by RBI to decide the price and the buyer, providing a shield to the management of the bank against charges of negligence giving a free h and to banks on the recovery of loans.
- The ordinance also empowers the government to authorize RBI to invoke the Insolvency and Bankruptcy Code 2016 in case of a default. Although the earlier provisions allowed the RBI to issue general directions to banks, the ordinance allows RBI to direct banks on individual cases to initiate the resolution under the provisions of Insolvency and bankruptcy code 2016.
This will help speed up the NPA resolution process as the Bankruptcy Code allows limited timeframe of 180 days which can be extended to additional 90 days if required. Otherwise, the liquidation takes place. This will instill fear among the defaulters and will discourage them from long delays in payment of interest or the principal.
Also read: Can the new Insolvency and Bankruptcy Code prevent Vijay Mallya like cases in future?
Implications of the Ordinance
- Reduction in NPA and de-cluttering the banking system
- Resolving capital crunch and ultimately increase credit availability in the market
- Deleveraging India companies, especially where they are levered above the limit. For instance the power and steel sector
Challenges
- Government and RBI might have to face charges of being bias as the onus to take a call to initiate NPA resolution process against the defaulter is on the two
- Having oversight committee is a right move but finding appropriate professionals for the same will be a challenge. Committees will prove to be effective only if there is enough number of people in these committees to survey individual default cases. Also, they need to be entrusted with wide scope of powers
- Although the Bankruptcy Code 2016 will help speed up the NPA resolution process, the problem that remains unanswered is recapitalization of the banks once stressed assets have been taken off its balance sheet. However, there is a provision to set up a cell within the cabinet secretariat that will rope in sector specific public sector undertakings to take over the stressed assets in eligible cases
- Ultimately, everything boils down to a significant recovery in the economy because apart from the cases of willful defaulters, there are several cases where defaults are simply linked to a slowdown in economic activities and decrease in dem and.
Also read: Reforms needed to check generation of black money
