The ordinance to amend the Banking Regulation Act, 1949 has been touted by the Union government as bringing serious changes to the status quo when it comes to the resolution of banks’ huge non-performing assets.
The real significance of the amendment, however, will depend on many unknowns that only time will answer. The ordinance gives the government the power to authorize the Reserve Bank of India to directly deal with banks in resolving NPAs by targeting specific borrowers.
The build up of NPAs threatens the solvency of banks, holding them back from lending to businesses. It is hoped that the RBI’s direct role in the resolution process will encourage banks to be bolder in taking hair-cuts .
Earlier, it is said, bankers feared questions from the RBI if they invoked the insolvency and bankruptcy code. But the prominent concern right now should be what percentage of NPAs will be successfully recovered by banks.
After all, it was only in April that the RBI mandated banks to increase provisioning for loans exposed to certain sectors, suggesting banks still don’t recognize the full extent of their losses. A related issue is whether willing buyers will emerge to purchase NPAs and the price these loans would command. There is also the issue of the risk that deep hair cuts pose to the capital position of banks, and if banks are in a position to absorb the impact. Lastly, the ordinance does not address the problem of cronyism at the root of India's NPA crisis. Since public sector banks have been the primary perpetrators and victims of cronyism, RBI deputy governor Viral Acharya’s suggestion of re-privatizing must be seriously considered.
Gross NPAs of India’s listed banks almost doubled from September 2015 to reach ₹7 lakh crore by the end of December 2016. The size of NPAs in the overall banking system is about ₹10 lakh crore. The ordinance, it is speculated, will first target the top 50 defaulters as the RBI turns into more than just a passive regulator.
