Story Of The Week


The amendments in the Section 35A of the Banking Regulation Act aimed to solve the issue of Non-Performing Assets can be briefly termed as NPA Resolution.

The issue of Non-Performing Assets has been eating up the whole banking and financial sector and questioned the strength of the economy. The accumulation of bad loans has slowed down the growth of the country. The gross Non-Performing Loans between 2015 and December 2016 was noted over Rs 7 Lakh Crore. 

The mechanisms which are presently available to banks to resolve the issue includes corporate debt restructuring (CDR), strategic debt restructuring (SDR) and the scheme for sustainable structuring of stressed assets (S4A).

These mechanisms have not given the desired results and hence a step to formulate committees to encourage bankers to take haircut decisions was suggested. This would not only encourage bankers to take quicker decisions but also shield them from any future investigations.

The new ordinance to amend Section 35A of the Banking Regulation Act is expected to step in and announce a series of measures like giving more powers to the lenders to resolve the issue. The ordinance empowers the Reserve Bank of India (RBI) and banks to initiate bankruptcy proceedings against chronic defaulters.

The RBI will be made to empower the oversight committee to take decisions on NPA resolution and this will help in breaking the existing deadlock emerging out from the inability of the banks to take decisions. The proposed regulation makes the Central Bank an integral part of the debt resolution process. The banks will be able to enjoy the freedom from the purview of the investigative agencies. 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.

Why NPA Resolution?

Stressed Loans

There has been a consistent rise in the stressed assets since past five years. Economic Downturn, Policy Paralysis and inadequate safety guards can be considered few of the possible reasons for the same.

Stressed Loans.jpg

Falling Debt Servicing Ability

According to estimates about 40% of debt lies with companies having the interest coverage ratio of less than one. It can be seen quite prevalent in the industries dealing with power and Steel.

Falling Debt Servicing ability

Large Corporate Share

For a quick recovery, focus on large borrowers would be absolutely necessary as they approximately accounts for 56% of the bank debt and about 88% of the banks NPA. The large borrowers can be defined as the debtors to whom lenders have an exposure of at least Rs 5 Crore.

Large corporate share

Rising Bank Losses and Capital Starvation

According to the IMF, Around one third of the banking system in India needs to set aside at least 3 years of earnings to provision adequately for bad loans. They can’t expect much help from the government either because of fiscal constraints.

SAIL’s losses have crossed `Rs 5,000 Crore in the last 18 months because of a crash in steel prices and at the same time NPTC has seen stagnant growth in sales and profitability for over three years now.

Rising Bank losses

Fall in Credit

Capital-starved banks can’t expand their balance sheets quickly enough because of slowdown in credit growth. There is fear of lending to corporates. The main reason why system credit growth is holding up close to 5% levels can be given out to be retail loan growth. In the last two years, banks have been overtaken by the debt market as the key source of credit to the commercial sector. Capital starved banks are in a tough spot and it also will not interest banks to sell the assets at cheap rates.

Fall in credit

The Challenges ahead

The NPA Resolution would solve many problems but there are a few that still need attention:

The sheer size of stressed assets is humongous

The stressed assets in the system account for Rs 14 Lakh Crore. The companies that run into stress are either a supplier to large companies or standalone companies. For terms of understanding of the company or a sector, RBI may not have the bandwidth to issue borrower specific instruction in case of bankruptcy.

Bankruptcy is not the final answer

To deal with the problem, the banks already had a good legal framework of Bankruptcy Code and it is not just bank dependent and even the  non-bank lenders have the power to trigger it. The bankruptcy code should be invoked by RBI in cases where there is a suspicion of a willful default or where one of the lenders accuses the borrower of willful default. Today, the outstanding loan where willful default cases are on is around Rs 70,000 Crore. 

Not all the bank lenders are on the same page on quantum of haircut

Quantum of haircut is another issue that comes in the way of banks. Every bank takes its own call which is based on their commercial assessment. In quite a few large cases, deep haircuts are required and the Indian banking sector are not in a position to take the deep haircuts.

Where are the buyers of distressed assets?

There are no buyers for the assets that were acquired by the banks by conversion of debts into equity or even if they are there, they want it cheap and this valuation issue can be a hindrance.

Bank recapitalization

Many PSBs are running at a bare minimum capital levels accounting for capital as the biggest problem and hence they are not very keen on fresh lending. The banks are not in the position to take hard measures to get rid of assets as that would require capital and that calls for an urgent need to recapitalize the banks.


The Reserve Bank of India (RBI) has been empowered by the Government of India to push banks to resolve stressed assets by invoking bankruptcy code against defaulters and also set up committees on a case by case basis, or sector specific committees to decide on restructuring which also includes deciding the quantum of haircuts or one time settlements. This is yet another step in the right direction and will pave the way for a new framework to deal with the issue of non-performing assets.
The development is sentimentally positive for the banking stocks and the Nifty Bank index is seen to be trading almost at 2014 election levels, with the other indices trading at lifetime high. This does reflect the faith of the investors on the steps that are being taken and measures that are being looked at for resolution of one of the biggest financial crisis of the present time i.e. Non-Performing Assets.



Categories: Story Of The Week