Public sector banks seeking fresh capital from the Centre would have to commit to reform their own operations and take immediate steps to improve their balance sheet position, the government said on Friday.
The lenders will also have to close unprofitable branches and put in place stronger systems for credit appraisals and management of non-performing assets (NPAs).
More measures
Apart from empowering the Reserve Bank of India to tackle the problem of non-performing assets in public sector banks more effectively through new provisions under the Banking Regulation Act, 1949, the government is working on some more measures to resolve bad loans that will be announced shortly, said Finance Minister Arun Jaitley.
“There are some other steps also being taken, which once decided… we will convey it to you. We are planning in the process of signing memorandums of understanding with public sector banks which seek capitalisation, specific provisions that will be incorporated,” he said.
These conditions, he said, would relate to immediate cash relief initiatives such as sale of assets, closure of unprofitable branches, reduction of overheads, business turnaround initiatives such as the strengthening of the credit appraisal process, active NPA management, among others.
While the resolution of NPAs is an ongoing process, the government wants to speed it up and see resolutions of specific bad loans. “Where resolutions at the joint lenders forum (JLF) used to take time, and many times the process was delayed as all bankers were not on the same page, directives have been issued to empower the RBI on this too,” Mr. Jaitley said.
Oversight committees
As per the new provisions incorporated in the banking regulation law allow the government to authorise the RBI to initiate insolvency and bankruptcy proceedings in relation to any stressed assets under Section 35 AA. A separate clause 35B allows the RBI to issue specific directions, including the formation of oversight committees (OCs) to resolve bad loans.
Currently, the OC mechanism functions only in relation to the scheme for sustainable structuring of stressed assets (S4A) for banks. The new provision will allow the RBI to form OCs in relation to resolution of specific accounts either under the insolvency and bankruptcy framework or any other JLF framework as well, the minister said.
A corollary benefit and objective of such oversight committees, Mr. Jaitley pointed out, is that bankers will have more comfort while taking tough decisions to write off or take haircuts on existing bad loans.
“When bankers take commercial decision on commercial and banking considerations, they must have an adequate comfort level. Therefore, a committee that oversees such JLF arrangements is one step that will give them this comfort level,” he said, adding that the government is also working on amendments to the Prevention of Corruption law to allow honest officials to discharge their duties without fear of a witch-hunt from investigating agencies.
“The proposed amendments have been considered by a standing committee of parliament and its report will now be taken up by both houses of Parliament,” Mr. Jaitley said.
