To expedite stress resolution in the banking system, Reserve Bank of India (RBI) Deputy Governor Viral Acharya said banks must initiate bankruptcy proceedings against loan defaulters if the lenders are unable to resolve bad loans in three months.
“I think we should give banks three months to rectify the account. You can’t rectify the account, it is a NPA, you’ve to file this case in bankruptcy. Chapter closed,” he said referring to the recent decision by the markets regulator, Securities and Exchange Board of India, directing companies to disclose any loan default within a day.
“RBI should not be in the business of creating restructuring schemes for banks to resolve a company,” Mr. Acharya said.
The Deputy Governor said the recovery of bad debts in India was low compared with other countries.
“Our loan recoveries are in the order of 15-25 paise to a rupee. In other parts of the world, where bankruptcy system is working well, and these things are being done in a timely manner, the recovery is to the order of 85-90 cents to a dollar,” he said.
Counter-cyclical buffer
The central bank also stressed on the need for counter-cyclical buffers — in terms of setting aside higher capital — during periods of higher growth.
“Right now, when banks make loans, entire provisions that the banks do, which is to save for a rainy day, which is am I preparing for the losses that are going to take place, is entirely pro-cyclical. I think we don’t talk about any adequate reserves being kept aside to bear a loss until a loan actually defaults,” Mr. Acharya said.
Most banks in the country do not make adequate provisioning — above the regulatory mandate — which could be used when non-performing assets are increasing.
The Indian banking sector has been battling a surge in bad loans over the last three years with gross NPAs climbing to about ₹8 lakh crore.
In percentage terms, gross NPA (GNPA) ratio of the banking system is at 9.6% and the stressed advances ratio at 12% as of March 31, 2017.
Recently, RBI Governor Urjit Patel had said that it was a matter of concern that 86.5% of the GNPAs were accounted for by large borrowers, that is borrowers with aggregate exposure of ₹5 crore and above.
