‘Biggest bad loans’ now in RBI’s crosshairs

The biggest 40-50 ‘bad loan’ accounts with public sector banks, with an exposure of ₹1,000 crore and above in each case, may be targeted for resolution as part of the clean-up of non-performing assets, which the Union Cabinet approved late on Wednesday.

According to bankers, the clean-up proposal also envisages the sale of ailing private sector enterprises, which have turned non-performing for banks, to public sector undertakings. Alternatively, PSUs could be given an operations and maintenance contract to explore the revival of the ailing units.

In addition, the RBI may be empowered to issue directives, including prescribing a time-bound uniform approach to resolving stressed assets and easing up on the provisioning front, to help banks purge their balance sheets of bad loans.

These initiatives are part of the package of key measures the Cabinet approved to tackle the NPA mess. An ordinance amending the Banking Regulation Act to empower the RBI has been sent to President Pranab Mukherjee for approval.

With the bad loans of public sector banks rising to ₹6.07 lakh crore by December-end from ₹5.02 lakh crore on March 31, 2016, the Finance Ministry, along with the RBI and stakeholders, had been working on a roadmap to address the issue over the past few months.

International ratings agencies have repeatedly underlined the challenges facing India’s banking sector as one of the downside risks to high growth.

“Significant contingent liabilities for the sovereign continue to emanate from public sector banks,” Fitch had said earlier this week in its sovereign ratings for India, adding that NPAs could rise rise further to 9.7 per cent of total loans by end of the fiscal from 4.6 per cent in 2015-16.

According to bankers, there are undue delays by banks in communicating their decision on corrective action plan (for revitalising distressed assets) and cases of banks with smaller loan exposures not coming on board.

The RBI may direct lenders in joint lenders forum (JLF) to take a uniform approach so as to expedite decisions. Banks could also get a breather by way of longer period to spread their provisioning.

The two-member overseeing committee (OC) under JLF may be strengthened further in view of the large number of loan restructuring proposals.

Further, more OCs could be in the works.

The OC has the responsibility to review the processes involved in preparing the resolution plan by the JLF/consortium/bank for loan proposals above ₹500 crore.

The move to strengthen the OC has come as a relief for bankers’ as it reviews the processes involved in preparation of a resolution plan for reasonableness and adherence to provisions of the various guidelines on asset resolution.

It has, to an extent, taken the pressure off bankers’ who feared victimisation by authorities should a commercial decision on loan resolutions go wrong.

The RBI had earlier set up an oversight committee under the Scheme for Sustainable Structuring of Stressed Assets (S4A). But this has had limited success due to stringent norms.

Indications are that the new policy will allow banks to take a haircut within permissible limit.

Meanwhile, in Delhi, Finance Secretary Ashok Lavasa expressed the hope that the amendments to the Banking Regulation Act will help in faster resolution of bad loans.

“It is not possible for me to put down a number on how the non-performing assets will go down but certainly we feel that these changes will make the system more effective in handling the bad loans," he told reporters on Thursday.

While Lavasa did not share details of the Ordinance, he said that many of the cases are likely to be resolved soon by harnessing the the professionalism of banks and the participation of the promoters.

“The amendments would enable the RBI and lenders to take effective steps to deal with problem of NPAs,” he said.

Lavasa also expressed confidence that there is sufficient appetite in the market for stressed assets.

He further said that the NPA situation has not worsened in the recent past and there has been improvement in some infrastructure sectors like power and road.